Gold and Silver Outlook for May 9-13

Although precious metals finished the week on a positive note on the coattails of the NFP report and its lower-than-expected growth in jobs – 160K jobs (actual) vs. 203K jobs (expected) – both gold and silver didn’t do much on a weekly scale: Gold edged up while silver slightly declined. In any case, the market remains unconvinced of a June rate hike by the FOMC despite the gain in wages to an annual rate of 2.5%. This week’s main reports will remain focused in the U.S. economy and include: consumer sentiment, retail sales, JOLTS and PPI. Other reports to consider in other countries are China’s CPI and Germany’s Germany factory orders and GDP for Q1. So let’s examine what’s next for gold and silver this week.

The market reaction to the latest NFP report was, as expected, positive for gold and silver. The linear correlations between PM and the surprise to the change in employment tend to be strong and negative as indicated in the following table; so that a report that comes with lower than expected growth in jobs, tends to lead to a rally in gold and silver prices, as was the case last Friday.

U.S.Labor May 8 2016

Source: BLS, Bloomberg

Despite this clear reaction in bullion, in other financial markets mainly equities it seems the market didn’t really know how to digest the latest NFP report: On the one hand, wages went up again; and yet, job growth missed market expectations. The way I see it, and probably the Fed also views this report, is that the labor market is nearing full employment; therefore we should see more wage growth, higher participation rate and slow decline in U6 – the last NFP report showed improvements in two of the three measurements listed above (the participation rate edged down); and job growth should be lower in hence forward. If the Fed interprets this report in this manner than this means the labor market is ready for another rate hike in the coming months. And the upcoming JOLTS report could provide another indication as to the current condition of the labor market. Last time, the number of jobs opening declined to 5.45 million jobs, and is expected to pick back up to 5.55 million in this week’s report.

But then there are two other factors that hold back the FOMC from considering raising rates: The bearish sentiment and low inflation. This week’s reports on retail sales and consumer sentiment could show how bearish the U.S. consumer is even though the consumer has been receiving higher compensation; without people spending more money and fearing of another economic slowdown not only Wall Street but also Main Street won’t do well; inflation is also the main issue that keeps the Fed from raising rates. This week’s PPI report will serve as a preview for the following week’s CPI report. If the core PPI doesn’t rise, this could indicate the market isn’t heating up. If core inflation remains well below 2%, the Fed won’t rush into raising rates in June. For now the market remains skeptical of even a single rate hike: Based on Fed-watch, the implied probability for a June hike is only 13% — only slightly higher than the previous week; for December, the odds are bit higher than 50%.

ETFs holdings: By the end of the previous week, gold holdings of the gold ETF SPDR Gold Trust (GLD) rose by 3.7%, week on week, to 834.19 tons of gold; silver holdings for the silver ETF iShares Silver Trust (SLV) declined by 0.3% to 336.1 million ounces.

Bottom line

Even though gold and silver didn’t do much last week, they both rallied on Friday following the disappointing – at least when it comes to the headline figure – NFP report. Considering there is little news items in the first few days of the week, the market will keep digesting the latest jobs report. And by the end of the week, if the consumer related reports – retail sales and consumer sentiment – fall short of market estimates, this could feed the bearish market sentiment and prompt more purchases of precious metals.

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