Gold and silver, much like many other commodities, took another hit last week. And the better than expected NFP report also provided additional downward pressure on precious metals. The strong gain in jobs paved the way, for now, for the FOMC to keep its course of raising rates even though inflation isn’t heating up and wages – the recent report showed a growth rate of only 2.5% — is still stable. So bullion is down but is it out? This week the U.S. economic data that will be released include CPI and retail sales and Yellen testifies on the Hill. Let’s examine how these events could shape the direction of precious metals.
The selloff of equities has cooled down, for now, and the risk on mode has appears to have made a comeback. The NFP report, which mainly disappointed on wage growth, still showed a gain of other 200K jobs last month – higher than expected. This news was enough to shift the sentiment in the market on Friday and selloff precious metals and LT treasury. Will this time around we will see a big and sustainable selloff of treasuries that will break a 30 year bull market? It remains to be seen but given the low inflation and falling odds of a fiscal stimulus, it will be hard to see LT yields picking up much higher than their current levels without more rate hikes by the Fed. In the meantime, as long as yields are rising, gold and silver investors are likely to suffer and see prices fall.
On this week’s agenda include U.S. CPI and retail sales. The first report will provide another indicator if inflation is still stagnating — especially after the previous report showed a lower annual growth in both headline and core CPI – then this may provide another boost for treasury bulls and bullion bugs. The market still prices in around 60% chance of another hike by the FOMC by the end of this year; therefore, if the report disappoint again and shows no pick up inflation, this could reduce the chances of rate hike, which, in turn, may also boost bullion prices. The same goes for retail sales, which showed a contraction in the last report. Finally, Chair of the FOMC Yellen will testify before Congress this week.
She is likely to be asked about the FOMC’s policy, the lack of inflation pressures, and the rise in interest rates even though the data don’t really support more rate hikes. Considering the markets expect this testimony, Yellen will try not to rock the boat. Unless she were to change her tone and turn a bit more dovish – given her recent hawkish tone – by voicing concern of lack of inflationary pressures – something that for now doesn’t seem likely – I suspect this event won’t move much markets, because she and the Fed are still on course to raise rates once more and perhaps even start normalizing the balance sheet later this year.
Putting all of this together, unless the selloff in treasury change course – which could happen if Yellen voices some concern over inflation or economic data disappoint again or all of the above – gold and silver may keep their recent downward trend.
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