Even though the chances of a rate hike remained nearly flat over the past week, long term yields have slightly declined, which gave a modest gain for gold and silver prices. But if the recent trend of the past few weeks – including rising LT yields and strengthening U.S. dollar – gold and silver could resume their downward of the past month. This week will focus again on the U.S. economic data and the changes in market estimates over the chances of a rate hike later this year by the FOMC. This week’s main economic reports include the U.S. GDP for Q3 (first estimate), consumer confidence, durable goods, and home sales reports. In addition, the markets will keep monitoring the news pouring in vis-à-vis the progress of the Brexit and U.S. presidential elections. So here is a breakdown of what’s next for bullion for the week of October 24-28:
The markets are slowly getting use to a possible rate raise in the FOMC’s December meeting and as of last week the chances of a hike remained stable: As of the end of the previous week, the implied probability of a rate hike in November remained flat again at 8.3%; and for December the odds also remained unchanged at 69.5%. Even though the chances of a hike remained basically flat, the 10 year treasury yields, as you can see in the chart below, edged down over the past week. And the modest drop in interest rates provided a slight gain for gold prices.
Source: Bloomberg and Treasury website
But this recent drop could change course again especially if the markets were to further push up the chances of a hike by December. Although at this point with close to 70% chance of a hike in December, the odds aren’t likely to rise much more in the near term. If the upcoming economic reports coming out of the U.S. including the GDP, durable goods and consumer confidences show higher than expected results; these reports could suggest the U.S. economy is doing well and the market may raise the odds of hike by the Fed – a turn of events that are likely to further push down gold and silver prices. The main report of the week will be the GDP for Q3; currently, the market expects the growth rate to reach 2.5%. If this report falls short of market estimates it could suggest the US economy isn’t doing so well as the market estimated; and this could, in turn, bring to a halt the recent recovery of the USD — another factor impeding the progress of precious metals prices.
The concerns over a possible harsh Brexit, the expectations for more stimulus from the ECB by the end of the year and the Fed’s possible tightening policy, are all helping to drive up the USD. And a stronger dollar doesn’t help gold and silver.
ETFs holdings: By the end of last week, gold holdings of the gold ETF SPDR Gold Trust (GLD) decreased by 1.23%, week on week, to 953.56 tons of gold; silver holdings for the silver ETF iShares Silver Trust (SLV) rose by 1.1% to 366.366 million ounces.
Gold and silver are still likely to struggle in the near term. Mainly on account of the stronger dollar and as LT interest rates remain at the current levels or even gaining some more momentum. But things could improve for bullion if the upcoming reports – most importantly the GDP report – fall short of market estimates, which could suggest the market may revise down a bit its outlook of a possible rate hike by the Fed this year.
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