Gold and Silver Report for July 17-21

Gold and silver bounced back a bit last week, but bullion is still from down its yearly highs – close to $1300 for gold and $18.5 for silver. This week there aren’t major U.S. economic reports and in Europe the ECB’s rate decision will take center stage. Equities will continue to take the lead for the results of companies’ financial reports as we are in the midst of earnings season. And gold and silver will likely to follow the lead of bonds, the U.S. dollar and the general market sentiment.

Even though the U.S. dollar has devalued against the major currencies in recent weeks, gold and silver didn’t gain from this depreciation. Only last week they both started to show some strength, in part following the reversal of U.S. treasuries. And in recent months, as I have pointed out in the past, the correlation between U.S. 10-year notes and gold has strengthened.

Source of data: FRED

Even so, the main factor that impacts the direction gold is still the USD. The table below shows the coefficients of USD and 10 year treasury yield for the percent changes of gold prices for this year, up to date.

Source of data: FRED

The standardized coefficients allow us to compare the impact of each variable on the dependent variable, in this case gold. It shows that dollar has a much stronger impact on gold than the 10 year notes have. Thus, it’s still important to keep notice of where the USD is heading. For now, it seems that it will keep lose ground against the leading currencies mainly the Euro. This week’s ECB monetary policy meeting isn’t likely to yield big headlines but the markets expect the Euro to keep rising given  the strength of the economy, the chances of the ECB to start tapering its QE program by the end of the year and the lower odds of any fiscal stimulus coming out of the U.S. Finally Yellen’s testimony – backed by the lower than expected numbers of U.S. retail sales and CPI – opened the door for the Fed not raising rates this year. As a result, within a week, the chances of another hike by December have dropped by nearly 10 percentage points to 48% by last Friday.

These issues are still likely to keep driving down U.S. yields and the USD, which, in turn, may help boost of precious metals prices.

Conversely, it’s important to notice that despite these turn of events, the markets are still optimistic about the state of the U.S. economy and the market sentiment is still bullish – at least for the most part.

As long as this sentiment is maintained and all the political stories pouring out of the U.S. over the Trump administration don’t materialize to an actual adverse event that could have an impact of the economy, the markets are still likely to keep moving upward; and this sentiment could also hinder on gold and silver from recovering.

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