Silver and gold prices fell again in the past week as the U.S. dollar kept rising and the market raised the odds of a December rate hike by the FOMC. Will this week be any different? The focus will shift to the old continent and ECB’s rate decision. The next day, the last NFP report for the year will be published. Between these two events we also have Chair Yellen’s testimony that could bring additional volatility for precious metals. Other events and reports to consider this week include: Rate decisions of Bank of Canada and Reserve Bank of Australia, manufacturing PMI of China and U.S. factory orders.
The ECB is likely to take center stage this week. There are a lot of speculations around what the ECB will do this week. Cut rates? Augment QE? Unless the ECB doesn’t announce of any policy change (or even hint of a future change), the Euro is likely to further depreciate. Since the beginning of the month, the Euro/USD dropped by close to 4% and by 12.5% since the beginning of the year. The USD also strengthened against other currencies, which is likely to adversely impact bullion prices.
Besides the upcoming ECB policy meeting, the NFP report will be released on Friday. Currently, the market expected the NFP will show a growth of 201K in jobs – lower than in October but in line with the average growth in jobs over the past year.
Source: Bloomberg, BLS
The FOMC will pay close attention to this report and will see if the report doesn’t disappoint. Another important figure to look for is wages. Last time, wages grew by an annual rate of 2.5%. If the next report doesn’t show a sharp fall in this growth rate to past range of 1.9%-2.2%, then this could suggest the recent report wasn’t just one-off – another positive sign for the labor market.
And since the Fed keeps stating the rate hike will be “data dependent”– Yellen is also likely to remind us of this fact this week in her upcoming testimony — a strong NFP report will bring the Fed even closer towards raising rates, which is likely to have another adverse impact on gold and silver prices. On this front, as of the end of last week, the implied probabilities, as derived from bond market, went up to 78% for a December rate hike; the chances for a March 2016 rate hike are also slightly higher at 89%. So the probabilities have gone up but still entail a hint of uncertainty. The FOMC raised our hopes for a rate hike too many times that by this time the committee suffers from the boy who cried wolf syndrome. Too many times we raised our “hopes” (I put hopes in quotations marks because I don’t think it will be a good idea to raise rates at this point) for a Fed rate hike to be fully convinced at this point in time. But if the Fed were to move forward, this implies the hike isn’t fully priced in the markets – including gold and silver – so by the December 16 there could be a strong adverse reaction for bullion prices.
By the end of the previous week, gold holding of the gold ETF SPDR Gold Trust (GLD) declined again by 0.9%, week on week, to 654.8 tons of gold. Conversely, silver holdings for the silver ETF iShares Silver Trust (SLV) remained flat at 318.2 million ounces.
Takeaway
This week could entail additional losses for gold and silver, mainly if the NFP show solid gains in jobs and keep wage growth elevated. So that it won’t suggest that the last report was just a one-off. If the next report does come short and put into question the progress of the U.S. labor market, the market is likely to revise down the implied probabilities of a rate hike – a turn of events that could actually pull back up, even if for a short term, gold and silver. Chair of the FOMC could also move markets, although she will try as hard as possible to keep us guessing and not revealing her hands about the next FOMC meeting. Finally, the ECB policy meeting is another important event that is likely to move the Euro. And if the Euro were to further devalue, this could also adversely affect precious metals prices. I remain bearish on gold and silver.
For further reading see:
- Financial Market Preview for November 30- December 4
- U.S. GDP Grew By 2.1% in Q3 – Now What?
- Between Terror and Thanksgiving – MM #77
- Will The Fed Do the Old Switcheroo?
- ECB’s QE Reloaded – Is It Enough?
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