Precious metals prices bounced back as the U.S. dollar devaluated against the Euro – mainly after ECB’s Draghi didn’t meet market estimates and only reduced the deposit rate to -0.3% without introducing an expansion of QE. And then the NFP report showed a gain of 211K of jobs – a bit higher than expected. But this wasn’t enough to impress bullion traders as gold and silver bounced back. Will this recent rally last? This week we have: U.S. JOLTS, BOE and SNB rate decisions, U.S. PPI, China’s CPI, U.S. consumer sentiment, China’s industrial production, and U.S. retail sales.
Following the recent ECB rate decision, the Euro/USD rallied – a 3% bump on Thursday – and may have partly contributed to the rise of gold and silver. Also, on a weekly scale, the USD devalued against the Euro, Aussie dollar, British pound and Canadian dollar. But then on Friday the NFP report came out. It wasn’t too surprising with solid headline figures, growth in wages (2.3%, year on year), upward revisions for previous months, and modest gain in participation rate. The reaction of precious metals wasn’t as expected. The table below shows this.
Source: Bloomberg, BLS
In the past, gold and silver tended to react negatively when the headline figures were better than expected. After all the linear correlations are -0.45 for silver and -0.48 for gold. This time it wasn’t the case. This could be a speculative move by bullion traders – the old saying of “buy the rumor, sell the fact”. After the lower than expected ECB rate cut with no expansion to QE and Yellen’s testimony, more people think the rate hike in December is a done deal. Well, maybe not…
Because then there is the implied probability of a rate hike by Fed-watch: It still shows that there is only 79% chance of a December hike – nearly unchanged from the end of last week. And the chances for a March 2016 rate hike went only slightly up to 92%. The little change in the implied probabilities could actually suggest that the NFP report and testimony didn’t impress bullion traders, which could explain the recent rally of gold and silver. In any case, this rally seems shaky and could change course in the coming days.
Looking forward, the focus will be on the pace of future rate hikes. For now, based on Fed-watch and the implied probabilities, the rate should be around 0.84% by the end of 2016 – this implies two rate hikes in 2016, assuming the December rate hike goes underway.
And low interest rates are likely to keep gold and silver at their current levels.
This week, the main U.S. reports will be retail sales, JOLTS, PPI and consumer sentiment. If the U.S. economy were to show strong growth on these issues of inflation, labor and consumer sales, this could have an adverse impact on bullion prices. In China, the industrial production and CPI reports will be released. Considering China is an important consumer of precious metals, the direction of this economy could also play a secondary role in their prices’ directions.
By the end of last week, gold holding of the gold ETF SPDR Gold Trust (GLD) fell again by 2.5%, week on week, to 638.8 tons of gold. Conversely, silver holdings for the silver ETF iShares Silver Trust (SLV) rose by 1% to 321.5 million ounces.
Last week came down to a disappointing ECB rate decision and unsurprising NFP report. In total, these events moved a lot the USD along with gold and silver. This recent rally of bullion prices could be short lived and we could see them change course, especially if the upcoming U.S. reports don’t disappoint or miss market estimates. Finally, considering the upcoming week will be a relatively slow one – mainly when you compare to last week or the week after that – then the market will likely to focus on digesting last week’s results and breaking down what’s up ahead.
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