Gold and silver took another hit last week even though the changes of a rate hike in September declined. Even though the markets cut the chance of a rate hike in the upcoming meeting, the markets didn’t change the chance of hike by December. And a higher cash rate may translate to a stronger USD and higher yields – which are two trends that could bring down gold and silver. So let’s review how the upcoming FOMC meeting could move precious metals prices:
The FOMC meeting will take center stage this week and especially given the high volatility from last week over the talks given by FOMC members, it seems that the market will take carful notice of this report. In the previous week, gold and silver prices dropped by 1.8% and 2.6%, respectively, even though FOMC member Brainard gave a dovish speech at the start of the week and reduced the chances the market gave for a possible rate hike in the upcoming meeting. As of the end of last week, the implied probability of a rate hike in September dropped again to 12%; and for December the odds have remained nearly unchanged at 55%. And if the next meeting is perceived dovish – as was the case in the past few times – this could give a boost to bullion prices and bring down the chances of a December rate hike. The table below presents the reaction of precious metals prices to FOMC meeting.
Source: FOMC and Bloomberg
The issues to consider in the upcoming report include:
- Dot plot: This will likely be the main issue that market members will look for; the market will look for two things: any changes to this year’s dot plot and whether there are changes to the terminal rate. The FOMC isn’t likely to revise this year’s dot plot but if we see a downward revision to the terminal rate and perhaps even for subsequent years, this will be considered a dovish move;
- Wording in the statement: The wording is also important and whether there are any dissenters to rate decision. The FOMC isn’t likely to make any major revisions and keep the focus on data dependency. But given the hawkish tone by Yellen and Fischer, the statement may be a bit more bullish/ hawkish than it did before, which will imply a possible rate hike in the coming months;
- Yellen’s press conference: Again, Yellen will try to keep the focus on data dependency, state the U.S. economy is doing better than in previous months and leave the door open for a rate hike
- FOMC’s bottom line sentiment: Given all of the above, the market will try to determine if the outcome from this meeting results in a higher or lower chance of a rate hike in the near term. If the sentiment is more bullish/ hawkish – this could be a net negative for gold and silver. And if the sentiment is more dovish – this could boost the demand for bullion prices.
ETFs holdings: By the end of the previous week, gold holdings of the gold ETF SPDR Gold Trust (GLD) declined by 0.28%, week on week, to 942.61 tons of gold; silver holdings for the silver ETF iShares Silver Trust (SLV) slipped by 0.1% to 362.434 million ounces.
Takeaway
The high volatility of gold and silver is likely to remain this week as the market awaits for the upcoming FOMC meeting. Leading up to this event, bullion prices are likely to remain relatively flat and seek a direction from the Fed as to where yields are heading. It’s more likely that the Fed will try to be a bit more hawkish — despite the recent disappointing NFP report – which could pressure further down gold and silver prices in the near term.
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