Gold and Silver Report for May 1-5

The bullion market has taken a beating last week as the risk-on mode has gained momentum following the relief from the tension over the French elections and relatively robust earnings in the U.S. But this week the focus will shift back to the Fed and the progress of the U.S. economy with the NFP report coming out on Friday. Let’s see how these events could unfold and what it means for gold and silver.  

But before we analyze the upcoming two major events in the U.S. – the FOMC meeting and NFP report – let’s also consider the upcoming second round elections in France this coming Sunday between Le Pen and Macron. Currently, Macron still has a sizable lead of 20 points in the polls so the markets are crossing this event off. For now, it seems very unlikely that there will be a surprise given the big lead; in case of the likely Macron win this event could still cause some movement in the Euro following the results and boost it up against the majors. For gold and silver the weaker dollar (with respect to the Euro) could be offset by the relief of no election surprise – so this event could be a wash for gold and silver.

It’s also worth noting the relation between gold and silver, which has had its ups and downs. The chart below shows the ratio between the two over the past year.

gold 2 silver ratio 2017

Source: Bloomberg and Author’s calculations

As you can see above, in recent weeks gold has outperformed silver. This isn’t something new and the recent rise in gold relative to silver could change course. But if this trend were to persist it could indicate a selloff in the bullion market.

The chart below shows the gold stocks of the leading gold ETF GLD:

gld stocks 2017 April

Source: GLD

Even though gold hoards have fallen in recent weeks they are still up for the year. But the same cannot be said for silver and the SLV ETF:

slv stocks April 2017

Source: SLV

Over there the ETF holdings are down for the year (up to date). And could indicate a selloff of silver even when silver prices picked up in previous weeks.

These findings are only there to provide another way to look at market developments in bullion. This doesn’t mean gold and silver are likely to be heading down nor that silver will keep underperforming gold. But if these trends persist, this could indicate another bear market for precious metals.

Turning back to this week’s agenda: Basically, it’s the FOMC and NFP.

On Wednesday, the FOMC will release its statement. The FOMC won’t release updates on forecasts and there will be no press conference. The markets give a chance of a rate hike at 4.8% according to the implied probability. So, no major changes. And this event could give a boost for gold and silver. And yet, the markets will look for two major things: Any clues about the next rate hike; when will the FOMC start reducing its balance sheet. If any new information will appear about these issues could lead to a selloff of bullion.

But considering the recent economic data – including GDP, CPI, PCE, car sales and retail sales – were all rather soft, the FOMC isn’t likely to be too hawkish in this upcoming statement. As they have shown in March, when the FOMC members want they can persuade the markets of a rate hike in a relatively short period of time without causing major disruptions to the financial markets; thus, no need to hurry. They will wait to see more data to support higher inflation and wage growth before raising rates again. And balance sheet normalization won’t commence before interest rates are much higher than their current levels.

This brings up to the NFP report: Currently the markets expect a gain of  194K and a gain of 0.3% in wages, month over month, or an annual gain of 2.7% — basically unchanged from the previous month’s growth rate. If the report disappoints again, as it did last month, this could lead to a shift in market sentiment towards risk-off – i.e. another boost to gold and silver prices.

In conclusion…

Gold and silver didn’t do well in the past couple of weeks. But if the FOMC were to keep a dovish tone in its next statement and the NFP report falls short of market expectations, then gold and silver prices could pull back up in the short term.

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