Gold and silver took a tumble last week. The FOMC meeting didn’t have any big announcements but the bullion market reacted with a sharp fall in gold and silver the next day. On Friday, however, the GDP report was released and showed a lower than expected growth rate – on that day, precious metals bounced back as the US dollar depreciated against leading currencies. This week the US non-farm payroll will be the main report for gold and silver. Other reports to consider include: US manufacturing PMI, PCE, and factory orders, Here is a preview for February 2nd to 6th, 2015:
The main report of the week is the non-farm payroll report. The current estimates are for 252K. If the NF payroll comes short of this number, gold and silver could see a rally on Friday. Otherwise, precious metals could take another tumble.
Last week’s FOMC meeting was concluded with little changes to the wording of the statement. Despite the little changes to the wording, the price of gold and silver tumbled down.
This time, the term considerable time was omitted and the new buzz word was “patience”. So now the FOMC is trying to keep its options on the table when it comes to timing of raising rates. The thing is, it seems less likely for the Fed to change course and push forward the first rate hike to end of the year.
It’s not unheard of the FOMC to come with surprise announcements – such as the start of QE3 or the end of it back in 2013. But to surprise the markets by not following through with its decision to raise rates – make less sense. For one, the whole idea of surprising the markets is to change market expectations and suggest that the Fed is capable of being “reckless” if needed and let the inflation crawl in the economy and pick up. But this hasn’t been the Fed’s goal throughout the past year. Albeit the FOMC has done in the past moves that could have pushed up the inflation pressure (QE, low rates, shifts in balance sheet, and promise to keep rates low for a long time), but those days seem to be over.
So after steering the market expectations towards a rate hike in mid-2015, why will FOMC chair Yellen back down? Answer – she won’t.
Sure, it’s still not a 100% guarantee for a rate hike in June. But unless the US economy takes a shift to the worse or the core inflation tumble down below 1% or the labor market cools down; then we are likely to see a rate hike in the coming months. The implied probabilities derived from the bond yields still suggest a rate hike in the next few months.
By the end of last week, gold holdings in the GLD ETF spiked again to 758.3 tons– 2.3% gain, week over week; it’s also up by 6.5% for the year, up to date.
Final note
Despite the recent plunge in gold and silver, they are still up for the year – 8% and 10.5%, respectively. If the next NF payroll report shows another strong monthly report, this could drive further down gold and silver. So we could see a modest fall in precious metals on a weekly scale.
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