Gold and Silver Report for May 8-12

The latest NFP report showed strong growth in jobs (211K vs. exp. of 194K) and modest decline in unemployment rate to a new low and yet wages are not picking up at a faster pace. This news, however, was still considered by the market as an indicator that the Fed is ready to move on rates again in June. Gold and silver prices followed this market sentiment and fell on Friday. With the markets pricing in an 87% chance of a rate hike next month, bullion prices are moving downward.   

It’s unclear how market participants have decided it’s very likely to see another rate hike in June, which will mark 3 hikes within 7 months! For gold and silver this sentiment doesn’t help even though the USD has remained relatively range bound in recent weeks. And the long-term interest rates have yet to move up – the 10-year yield is still around 2.3%-2.4% — which could indicate the markets aren’t expecting too much of inflationary pressure in the coming years. The recent fall in the 5 in 5 year forward inflation expectation rate is another indication for no real inflationary pressure. Despite the fact that 10 year yields aren’t picking up, gold and silver prices have been falling in recent weeks. This could be not only related to the expectations of higher rates from the Fed — that should eventually raise long term yields — but also due to the calmness of the markets that brought down volatility — one of the prime driver of higher bullion prices. As long as the calmness in the markets persist, bullion aren’t likely to recover.

If the markets are miscalculating the Fed so that the next rate hike won’t occur in June, this could suggest a possible short term recovery of gold and silver during next month. After all, when it comes to inflation: Wages growth, core and headline PCE and CPI are all indicating lack of inflationary pressure. This may change in the future but for now it doesn’t seem to be the case. Thus, the Fed may decide to hold off the next hike especially if the next CPI, retail sales and NFP reports don’t show an overheating of the economy.

Keep in mind, that even if the Fed doesn’t move this time on raising rates, it could still raise rates twice more this year in September and December. Thus, there is no pressure to raise rates so fast so soon. The only reason to raise rates now is to take advantage of the calmness of the markets and cool down the rise in housing and equities.

This week the markets will look at the upcoming retail sales and CPI reports that will be released on Friday. Any signs of economic slowdown could reduce the chances of a rate hike and pull back up gold and silver.

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