The gold and silver market cooled down last week, as the U.S. dollar bounced back and started to appreciate against leading currencies such as the Euro British Pound and Yen. The U.S. GDP showed a growth of 3.9% — higher than expected. This report along with Yellen’s hawkish speech kept driving up the USD. And China’s disappointing manufacturing PMI didn’t help bullion’s market sentiment. Will gold and silver start to fall back down or resume its rally? The upcoming non-farm payroll will be main event that could move gold and silver.
Besides the non-farm payroll report, on this week’s agenda we have: EU flash CPI, U.S. factory orders, Canada’s GDP, U.S. consumer confidence, U.S. PCE, China and U.S. manufacturing PMI. Let’s breakdown the upcoming events and reports for the week of September 28- October 2:
The main report that came out last week was the final GDP estimate, and Yellen’s hawkish speech at the end of the week. But are these developments enough to change the market perception?
Following this news, the implied probabilities for a rate hike remained unchanged: for October 11% and for December 39%. This goes to show that despite the hype driven by analysts and pundits over Yellen’s speech and the GDP report, the market remains indifferent. Perhaps the market doesn’t buy the whole bait and switch routine of promising to raise rates and then not following through. For bullion investors, however, this is good news and kept, so far, gold and silver from resuming their downward trend.
Looking forward, we have the main event of the week – the non-farm payroll. Last time, the NFP came short of market estimates – only 173K compared to expectations of 220K. This week, the projections are at 202K jobs. The Fed will closely review not only the rise in jobs but also the changes in wages. Even though the jobs report tend to be negatively correlated with precious metals, in the last report, gold and silver still came down. Nonetheless, if the jobs report shows a gain of over 220K jobs gold and silver are likely to come down. And if it shows a lower growth – below 190K jobs, this could pull back up bullion. In the middle of the range, between 190K and 220K, it could keep prices in check.
Source: Bloomberg, BLS
It’s important to know that the reaction in the bullion market isn’t solely based on NFP jobs gains, but also unemployment rates, wages, participation rate, the reaction of the USD, and the change in market outlook about the Fed’s policy.
Other reports to consider are China’s Caixin final Manufacturing PMI and U.S. Manufacturing PMI. For China the flash report was very disappointing with a rate of 47. If the final estimate is sharply revised, this could raise the concerns over China’s progress, which isn’t good mainly for silver. The U.S. Manufacturing PMI is also expected to fall, this time to 50.8 – last month it stood at 51.1. A drop in the PMI will mean manufacturing sectors are still expanding albeit at a slower pace. This could move the USD, which, in turn, also impact the direction of gold and silver prices.
In terms of the changes it the demand for ETFs, there wasn’t a clear trend: By the end of last week, gold holding of the gold ETF SPDR Gold Trust (GLD) rose to 684.1 tons of gold – 0.88% gain, week on week, while silver holdings for the silver ETF iShares Silver Trust (SLV) fell again by 0.8% to 318.2 million ounces. Both ETFs, however, are still down for the year. Despite the lack of growth in major ETFs, it’s worth mentioning that some countries such as Russia have been stocking up on gold, as presented in the chart below.
Source: Gold Council
Even China, which has started to provide updated data on its gold holdings have been accumulating gold. The rise in demand for gold in certain countries could be keeping up the price of gold from tumbling to new lows for this year.
Final note
The recovery of gold and silver came to a halt and especially after Yellen’s speech and the stronger than expected U.S. GDP report could further fuel the hype, especially among analysts, over a possible hike in December – in the bond market the rate hike outlook hasn’t changed. And if the non-farm payroll shows a gain of say over 250K jobs, this could push further up the USD and slightly increase the odds of a rate hike – two factors that don’t play in favor for precious metals. Nonetheless, the market is likely to remain skeptical about the Fed’s determination to raise rates this year after the dovish FOMC policy statement. I still think that for now, the movement in foreign exchange market will be the key issue in moving bullion. And in the short term, stronger U.S. reports will keep fueling the appreciation of the USD. So precious metals could change course and start their slow descent again.
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