The bullion market got some positive news from the FOMC: The expected cash rate by the end of 2015 and 2016 – based on the dot plot – was revised down. This provided backwind for interest rates to come down, sell off USD and pull back up gold and silver prices. This week the main reports include: U.S. GDP for Q4, core CPI, durable goods, and UoM consumer sentiment. Yellen will give a speech, ECB President Draghi testifies and HSBC will release its China’s manufacturing PMI. Here is a preview for March 23rd to 27th, 2015:
The recent FOMC meeting ended with optimism for the doves as the FOMC may not be as hawkish as previously estimated. The reaction in the bullion market was positive as gold and silver prices recovered following the release of the statement.
The table above shows the reaction of gold and silver following the past FOMC meetings decisions. As you can see, in four of the past five meetings the market reaction of gold and silver was mostly negative. The recent dovish statement by the FOMC brought down the implied probabilities — they currently give a 24% chance of a rate hike in July and 46% of a rate gain in September.
This week the two main reports to be released in the U.S. include the last update for the GDP for the fourth quarter and the consumer price index for February. The FOMC revised down its outlook for both the GDP and CPI. Does this mean the FOMC members had access to the BLS data before everyone else so that we could see lower than previously estimated GDP and CPI? If the U.S. economy is actually growing at a slower pace than previously thought, this could have some more short term positive impact on the direction of gold and silver prices.
By the end of the last week, gold holdings in the GLD ETF dropped again by 0.84% to 744.4; despite the recent fall in its gold holdings, its holdings remain up by 4.5% for 2015, up to date.
The recent surprise from the FOMC could keep gold and sliver prices elevated, especially if the U.S. dollar continues to descent and further devalues against leading currencies. But I still think that the USD will eventually resume its rally mainly against the Euro and yen. Also, the recovery of gold and silver may progress over the short term as interest rates further fall on account of changes in the market expectations about the direction of the Fed’s cash rate and the rise in demand for U.S. bonds. But once the tables will turn – e.g. the FOMC will turn more hawkish again or interest rates start to rise again, or USD resumes its rally – the bullion market will soften again.
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