During the previous week, gold and silver prices plummeted. The upcoming FOMC meeting could stir up the precious metals markets especially if the Fed surprises and changes its monetary policy. The current expectations are that the Fed will start taper QE3 from $85 billion to $70 billion. Considering the little effect long term securities purchase program has had in recent months on the U.S economy, and the slow growth of U.S labor market, the Fed might need to change its policy and introduce new measures to jump start the economy. Will gold and silver continue to fall this week? Here is a short outlook for September 16th to September 20th including: U.S industrial production, German ZEW economic sentiment, U.S core CPI, Philly fed survey, U.S housing starts and existing home sales, and U.S. jobless claims..
Gold price plummeted by 5.61% last week; further, the average price reached $1,350.46 /t. oz which was 2.93% below last week’s average rate. Gold ended the week at $1,308.4 /t. oz.
Moreover, silver price also plunged by 9.10%; the average weekly rate was $22.72/t oz, which was 4.01% above last week’s rate.
Herein is a short overview showing the main reports and events that will come to fruition during September 16th to 20th and may affect precious metals prices.
For next week, let’s break down the forthcoming publications and events according to the leading economies:
U.S and FOMC meeting
The FOMC will decide whether it will reduce its asset purchase program. Many analysts suspect the FOMC will reduce its asset purchase program to $70 billion a month. Since the treasury bonds purchase program has had little effect on the economy, and since the labor market is only slowly progressing, the FOMC might decide to taper QE3 and also take other measures to stimulate the economy, such as revising up the inflation target (say from 2% to 3%), increasing the mortgage backed securities purchase program, or pegging the long term interest rates (10 years) at 2.5%.
The recent fall in gold and silver prices might suggest the market is expecting the Fed to cut down its asset purchase program.
Moreover, according to “Google Trends” the search of the word “tapering” has risen in recent weeks to its highest level this year.
The chart below shows the search interest relative to the highest point on the chart – in this case the highest point was during the week of August 18-24, the week in which the Fed released the minutes of the recent FOMC meeting.
Let’s break down the potential decisions that could be taken:
- If the Fed introduces new measures (or even hint to the fact) to stimulate the economy (with or without tapering), this could pull back up gold and silver prices;
- If the Fed only tapers, it is likely to slightly drag down gold and silver prices;
- If the Fed doesn’t introduce any changes to its monetary policy, gold and silver prices might rally.
- If the Fed only hints it will taper QE3 in the near future, this could have little effect on the financial markets.
Besides the FOMC meeting, several other reports could slightly affect precious metals prices. This week’s reports include core CPI, Philly fed index, industrial production, housing data (housing starts and existing home sales), and jobless claims. If these reports meet projections, they may adversely affect gold and silver. Finally, if the US stock market continues to rise, this trend is likely to lower the demand of precious metals.
The Euro remained little changed in the past couple of months. Moreover, the correlation between precious metals and Euro/USD has declined in recent months. This could suggest the Euro/USD has had little effect on gold and silver prices. The upcoming EU reports including EU CPI, German ZEW economic sentiment, could affect the Euro, which, in turn, could slightly affect gold and silver.
China and India
In China, the improvement of the economy along with the strong demand for gold and silver are likely to keep the prices of gold and silver from tumbling down. Conversely, in India, the Indian Rupee slightly moved against the USD. But in total the Rupee lost more than 2.8% of its value in the past month. If the Rupee resumes its downward trend, this could pull down gold and silver prices.
Finally, gold holdings of SPDR gold trust ETF declined again for the second time in the past five weeks. During last week, the ETF’s gold holdings fell by 1.08%. The ETF was also down by 31.55% since the beginning of 2013 (up-to-date). Current gold holdings are at 911.12 tons. If the ETF’s gold holdings keep declining, this will signal that the demand for gold as an investment is softening.
I think gold and silver might continue to fall, if FOMC reduces its asset purchase program without introducing new stimulus plans, and if U.S reports including Philly fed and housing data reports meet expectations. Finally, the volatility is likely to rise again as the FOMC meeting will unfold the Fed’s next move.
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