As the U.S. dollar rallied against other currencies – mostly against the Euro and Yen – gold and silver kept slowly falling. Does it mean it’s only downhill from here on to the end of the year for precious metals prices? For now, the short term outlook isn’t too promising and except for really short term bounces, the trajectory is likely to remain downward. This week will be a short one in the U.S. on account of Thanksgiving, which will mean a decline in volume of trade. The U.S. GDP for Q3 will be released this week and will be focus of attention. Other reports to consider including: Consumer confidence, durable goods, GDP for GB, U.S. existing home sales, German Ifo business climate, U.S. core PCE, and EU and German manufacturing PMI. So let’s preview the week for gold and silver.
The main event of this short week will revolve the U.S. GDP report for Q3. This will be the second estimate. In the first estimate, the GDP was estimated to expand by only 1.5% — modestly lower than market estimates and well below the growth rate in Q2 that stood on 3.9%.
Source: Bloomberg, BEA
As I have pointed out in the past, there tends to be a strong correlation between the movement of the U.S. dollar and the deviation of the GDP headline figure from market estimates. The table above presents the reaction of U.S. dollar to yen exchange rate on day of the GDP’s report release and the deviation of GDP from market estimates. The linear correlation is positive and strong, and the relation between gold prices changes in U.S. dollar/Yen is also mid-strong and negative – in both case, as expected. When GDP is higher than expected the dollar rises and when the dollar rises gold tends to fall. But when you look at relation between GDP and gold there isn’t one. So it could be a matter of interfering variable (perhaps other reports that are released close to the GDP report such as FOMC reports) or other “statistical diseases” that eliminate this relation. But in any case, at face value, we should consider that gold and silver may not react to the GDP report as one would expect. It doesn’t mean the GDP is irrelevant only that the reaction could be unexpected. Over the longer term, however, as we get in more data to suggest the U.S. economy is recovering, the U.S. dollar is likely to strengthen, interest rates will rise and bullion prices – fall.
Other U.S. economy reports that will be released this week worth noticing including core durable goods, and consider confidence. If they show better than expected results, they could move up the USD, which, in turn, may drag down gold and silver. Finally, the core PCE will come out this week. Over the past few months the month-over-month growth in core PCE was unchanged at 0.1%. The Fed follows this report and if it were to show a rise in core PCE, this could further increase the odds of a December rate hike.
Speaking of which, as of the end of the previous week, the implied probabilities for a December rate raise are slightly up at 70%; the chances for a March 2016 rate hike are 87% — also modestly higher from the end of the previous week.
By the end of last week, gold holding of the gold ETF SPDR Gold Trust (GLD) inched down by 0.2% to 660.75 tons of gold, week on week. On the other hand, silver holdings for the silver ETF iShares Silver Trust (SLV) increased again by 1% to 318.2 million ounces.
So what’s the bottom line?
The bullion market has seen better days and the recent downward trend may continue, especially if the U.S. economy were to keep showing signs of recovery, which will further persuade the market that interest rates are expected to rise in the coming months. It’s worth noticing that the expected drop in volume of trade at the end of the week – mostly in the U.S. on account of Thanksgiving – could lead to possible high volatility. So precious metals prices could also experience high swings. But in any case, unless the upcoming U.S. economy reports disappoint – most notably the GDP update – gold and silver are likely to slowly decline again this week.
For further reading see:
- Financial Market Preview for November 23-27
- Between Terror and Thanksgiving – MM #77
- U.S. GDP – Only a 1.5% Gain in Q3
- Will The Fed Do the Old Switcheroo?
- ECB’s QE Reloaded – Is It Enough?
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