Gold and Silver Report for June 12-16

Gold and silver have taken a pause from their rally of the past several weeks. But this pause could end this week as the FOMC plans to raise rates. Although the market is already pricing in the next rate hike, the market will also look at the FOMC’s dot plot, economic outlook, the statement and Chair Yellen’s press conference in order to determine what the Fed plans to do throughout the rest of the year, and its opinion of the state of the economy. Let’s break down what could happen in the upcoming FOMC meeting and what does it mean for gold and silver.

Considering the current compliancy in the markets when it comes to the low volatility, this means the possibility of a surprise decision by the Fed, as unlikely — yet still plausible — as it may, could lead to a surge in market volatility and bring back the risk-off mode in the markets.

Given the current climate in the markets, the expectations, the data and what FOMC members have been conveying in recent weeks I see there are three main plausible outcomes for the upcoming FOMC:

  1. A hawkish hike: Consider the market is pricing in the June hike at close to 100%, the Fed won’t surprise and raise rates. Yellen will continue to brush off the latest weak data as transitory. And the Fed may keep the outlook regarding rates and inflation unchanged or almost unchanged.
  2. A balanced hike: The Fed will raise rates and also acknowledge the recent economic data and point out that this may be a cause to be more data dependents – considering the upcoming rate hike isn’t really based on the current data. The Fed may also revise down some of its economic outlook such as rates and inflation for 2017 but revise up/ keep unchanged these data for 2018. And yet the Fed will still maintain its positive outlook about the economy and state that the recent weak data are only transitory and could change course in the coming quarters.
  3. A dovish hike: In this case the Fed will raise rates but also acknowledge the data support pausing and it will want to see inflation picking up again before the FOMC raises rates again. The Fed may also revise down the dot plot and economic outlook for 2017 and perhaps even for 2018. Yellen will also put more emphasis on not raising rates too soon and so the data support a more “wait and see” approach.

All three scenarios are roughly equally likely although the balanced approach is the one the FOMC tends to prefer especially in this stage of the business cycle. So perhaps the second outcome is a bit more likely than the others. For gold and silver, the second and third options are more likely to drive their prices up while the first option is likely to pressure down their prices.

There are two more things to consider:

  1. The Fed could decide not to raise rates. This isn’t likely given the current outlook of the market but if there is a time to wait before a hike, it was this time. The data, as stated numerous times – including NFP report on wage growth, number of jobs added, participation rate, core and headline inflation – all point out to a slowdown in inflation and a tightening of the labor of market. So, the Fed might consider the “wait and see” approach; an approach they have used many times in recent years. But considering most of the FOMC members, who have talked in recent weeks, didn’t try to change public opinion and put into question the forthcoming June rate hike, this scenario seems highly, albeit still possible, outcome.
  2. Balance sheet rebalancing: The market will also pay close attention about whether the FOMC starts to show a clearer path as to how they plan to reduce the balance sheet. So far, however, the market reaction didn’t occur when the FOMC mentioned this issue in the past, thus the market might also brush this matter again. And yet this issue is still important and will eventually impact the market liquidity.

What does it all mean for gold and silver?

The market volatility – at least in equities – has started to pick up again, but this didn’t leak into commodities so far. The FOMC’s upcoming decision could move gold and silver especially if the FOMC doesn’t deliver a hawkish sentiment. And keep in mind that even though the FOMC raised rates twice in the past six months, LT yields are back to the levels recorded in November 2016. This plays in favor for bullion bulls. If the upcoming rate decision doesn’t do anything in moving up LT yields, gold and silver could get another short-term boost. And if market volatility slowly continues to rise, this too could play in favor for precious metals.

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