The gold and silver market didn’t have a good year with a 10% drop in prices. Will 2016 be any different? A lot will ride, yet again, on the Federal Reserve policy. And this week we have two reports that could shed some light on this matter including the minutes of the December FOMC meeting and the non-farm payroll report. These reports could move not only the U.S. dollar but also precious metals prices.
Let’s start with the NFP. Currently, the market expects a growth in jobs of 202,000 – around the same level recorded back in November.
Source: Bloomberg, BLS
These numbers aren’t too impressive but are also good enough to maintain the positive outtake of the U.S. labor market. Looking beyond the headline figures, it’s important to examine the progress of “real unemployment”, participation rate and – even more important – the growth rate in wages. If the growth in wages – last month it reached an annual rate of 2.3% — doesn’t pick up and even declines, this may call into question the Fed’s rate hike. If the growth rates remains close to 2.3% and perhaps rises to around 2.5%, this will reinforce the Fed’s current policy.
For gold and silver, the last report didn’t hold back their prices from rising, even though the U.S. dollar slightly appreciated against the Yen. Precious metals tended to be strongly negatively correlated with the surprise in the headline figure – although the last report shows that when the surprise factor isn’t substantial this relationship doesn’t always holdup.
So unless there is a significant deviation from the NFP headline figure, gold and silver prices are likely to rally: Over the last two years, the surprise – either higher or lower than expected – in the headline jobs growth came below 15K jobs (in absolute numbers) on eight occasions. Of these times, in six of them gold and silver prices rose. In other words, in 75% of the time the PM prices rose when the surprise was very modest – regardless of the direction of the surprise.
The big picture is how these numbers and progress of the labor market shape the Fed’s monetary policy. This brings us to the minutes of the FOMC meeting. The minutes could provide more information about the FOMC’s members’ deliberations. If the minutes reaffirms the hawkish sentiment among Fed members, this could further bring down gold and silver prices.
According to the recent update by Fed-watch, the implied probability for a hike may in March is 56% – nearly unchanged from the previous week; and 78% in June 2016. By the end of the year, the market estimates the Fed’s cash rate will come below 1% — or around 2 hikes of 25bp. This is still below FOMC members’ outlook of 4 hikes.
The recent fall in bullion prices also coincided with the decline in bullion ETFs holdings: By the end of the previous week, gold holding of the gold ETF SPDR Gold Trust (GLD) decreased by 0.4%, week on week, to 642.37 tons of gold. And silver holdings for the silver ETF iShares Silver Trust (SLV) also fell by 0.3% to 317.9 million ounces.
This week, gold and silver are likely to be driven by the direction of the Fed’s policy and the U.S. economy. If the labor market keeps showing strong growth – perhaps even well above market estimates – and the minutes of the FOMC reaffirm the direction of the Fed for 2016 – i.e. raising rates at a steady pace of 0.25 bp every other meeting – these reports are likely to push down gold and silver prices.
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