The bullion market remained poised last week as gold slightly rose while silver modestly declined. But this could all change and precious metals may take another severe hit this week if the upcoming FOMC meeting were to set the stage for a rate hike in the coming months. Excluding a pessimistic sentiment in the statement and/or a harsh dovish tone in the press conference by Yellen, which, let’s face it, could happen – after all she is still a dove — we are likely see a rise in the U.S. dollar and fall in gold and silver prices. This is likely to occur even if the FOMC doesn’t report on any changes to its interest rates – in that scenario the USD will jump high and bullion prices are likely to tumble. Just setting the ground work for a rate hike in September/December could be enough to do the trick. Besides this major event, other events to consider this week in the U.S. include: Housing starts, CPI, and Philly Fed index. In Europe, ECB President Draghi will testify, GB and EU CPI and Great Britain Claimant Count Change. Finally, in Canada, we have manufacturing sales, retail sales, and CPI. Here is a preview for June 15-19, 2015:
The upcoming meeting could increase the financial markets’ volatility considering this time the meeting includes a press conference, an update to the Fed’s outlook and the dot plot chart.
Source: Bloomberg, FOMC website
As you can see, in 8 out of the past 11 meetings in 2014-2015 followed with a drop in gold and silver prices. Every time, the market’s reaction is, in most cases, bearish for precious metals as the FOMC slowly moves towards raising rates.
This upcoming meeting, however, the market doesn’t expect to see a rate hike. Even though the jobs report was solid in the last NFP report and JOLTS report also showed a jump in job openings, the FOMC is likely to slightly revise down its outlook on the labor market – mainly due to the weak result in March.
The GDP forecast for 2015 is also likely to be revised down. But the tone of the statement is still expected to be upbeat with optimism about the progress of the US economy.
The FOMC is likely to keep a lid on the timing of the rate hike, but keeping an optimistic outlook – even with the modest downward revisions – could be enough to bring further down gold and silver.
As of the end of last week, the implied probabilities in the bonds market, shows that the odds of a rate hike in September have stabilized at 30% and 68% in December. These figures could slightly rise again if the FOMC keeps an optimistic view about the US economy.
The silver lining for the bullion market could be if the FOMC revise down again the dot chart, which were revised down back in March 2015 and December 2014. Another downward revision could suggest that even if the FOMC plans to go along and raise rates this year, the pace could be slower than previously estimated. Such a revision could be enough to offset the optimism of the FOMC. After all, this was the case in March and December – bullion prices actually rallied following those meetings. Keep in mind that currently the median estimate for the Fed’s cash rate by the end of the year is at 0.625%; so another downward revision will basically cut down the possibility of a rate hike in September. This scenario, while still very plausible, for now, seems less likely.
By the end of last week, gold holdings in the GLD ETF declined again by 0.67% to 703.9; The ETF’s gold holding are down by 1.2% for the year, year-to-date.
Bottom line
The FOMC is likely to move the prices of gold and silver in the inverse direction of USD. For now, it seems more likely to see another rally of the greenback and higher interest rates, which are likely to further drag down gold and silver. But we could also see a change in dot plot – a downward revision – which could, as in the past, bring back up gold and silver – even if for a short while.
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