Gold and Silver Outlook for October 26-30

The ECB and PBOC aim to help stimulate their economies: The ECB by hinting of more QE to follow and PBOC by cutting rates again. For gold and silver, a stronger U.S. dollar, brings down their prices. And these decisions and their implications are likely to keep echoing in the markets at the beginning of the week, at least until Wednesday – when the FOMC statement will come out. Will the Fed pull back up gold and silver prices? Besides the Fed, this week we have the U.S. GDP for Q3, consumer confidence, PCE, durable goods. In Europe, GB’s GDP for Q3 will be released along with EU flash CPI, and EU M3. So let’s review the main events and reports of the week and their possible impact on gold and silver.

The center of attention will return to the U.S. as the FOMC will convene for it penultimate meeting for the year. This time around, the expectations are very low for any big changes to monetary policy – this meeting won’t include a press conference or updated outlook – and the reaction is also expected be mild compared to the previous meeting.

fomc statment gold and silver Oct 24

Source: Bloomberg, FOMC

But this doesn’t mean the market won’t react to the statement. After all the past couple of NFP reports didn’t show strong numbers of jobs gains, the participation rate is still low and wages are slowly rising at around 2% — which hasn’t changed for a long time. If the labor market is progressing, we should have should have started seeing higher growth rate in wage. Also, the recent U.S. economic reports weren’t too optimistic including retail sales. And the GDP for Q3, which will come out this week as well is likely to show a much slower growth than in Q2. Finally, as other central banks such as ECB are ramping up their monetary policy, the U.S. dollar is likely to strengthen – this may also hold back the Fed from raising rates in the near term.

Currently there are four main possibilities for the upcoming statement:

  1. Most likely: Very short and balanced statement: In this case, the FOMC won’t offer any big headlines as its members will try not to rock the boat. In this scenario, the market reaction is likely to be mild to this news and we may see gold and silver react in a similar way as they did back in the July report – some gains, some losses but no real change.
  2. Less likely: Voice some concern over the state of the economy: If the Fed isn’t about to raise rates in December – and for now it’s highly possible – the statement could be a bit more dovish as the Fed lay the groundwork for delaying the rate hike to next year. Perhaps voice its concerns over the global economy, the strong U.S. dollar, low growth in wages, the slowdown in jobs gains, or any other issue the Fed may have. This could have a stronger positive impact on gold and silver – as was the case back in the September meeting.
  3. Even Less likely: Heavily hint of possible raising rates in the coming months: It’s less likely because the Fed kept promising it will raise rates for a while so releasing a statement with hints won’t do much good for the Fed. Say the economy takes a turn for the worse in the next couple of months, the Fed is likely to back down from raising rates in December. And the stronger worded hints won’t do the Fed’s credibility any good. But if the Fed does so, it’s likely to have an adverse impact on gold and silver.
  4. Very low chance: Raising rates by 0.25%: This could still happen this time, although the Fed will likely want to make this historic rate hike with a press conference. Also, doing hawkish surprises isn’t something the Fed wants to do – only dovish surprises. The reason: Dovish surprises aim to change expectations and heat up the economy, while hawkish surprises is likely dumping cold water on someone sleeping – it could cool off the economy too fast and too soon. If the Fed does raise rates this time, gold and silver prices are likely to erase their gains of the past few weeks.

For now, the implied probabilities for a Fed hike in October are still low at 6%; for a December hike the odds have gone up to 39%. And for March 2016, the chances are 60%.  The upcoming meeting is likely to change to these estimates. If the chances start falling again, gold and silver are likely to benefit.

Besides the FOMC meeting, the U.S. GDP for Q3 will also be published.

gold and gdp Q3Source: BEA, and Bloomberg

In the past, the changes in the growth rate in GDP tended to have a strong positive relation with the changes in the USD/Yen. But not a strong relation with gold and silver. In any case, consider the market is revising its outlook on the Fed’s rate decision based on the progress of the U.S. economy; if the report shows even lower than expected growth rate, the prices of gold and silver are likely to rally.

Other U.S. reports include consumer confidence, core durable goods, and core PCE, but the impact of these reports are likely to take the back seat to the FOMC statement and GDP.

By the end of last week, gold holding of the gold ETF SPDR Gold Trust (GLD) slightly rose to 695.5 tons of gold – 0.26% gain, week on week. And silver holdings for the silver ETF iShares Silver Trust (SLV) also inched up by 0.1% to 315.5 million ounces.

Takeaway

The ramifications of the ECB’s monetary policy meeting are likely to further echo in the coming days and pull up the USD against the Euro, which could keep pressuring down gold and silver.  Even though precious metals prices may keep falling in the beginning of the week, the market could pull their prices back up especially if the FOMC turns a dovish statement and the economic reports mainly GDP shows a lower than expected growth rate.

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