The recent announcement of SNB’s Thomas Jordan caused a lot of excitement in the markets – this includes gold and silver. Precious metals bounced back last week following this news. The ongoing recovery of gold and silver is mostly related the fall in U.S. treasuries yields. Looking forward, should we expect gold and silver to keep climbing up? This week the main event is the ECB’s monetary policy meeting, in which Draghi may provide more information about the forthcoming QE program. Other events and reports to consider this week that could move gold and silver include: China’s GDP for the last quarter of 2014, U.S. housing starts and building permits, MPC and BOC rate decisions China’s industrial production, U.S. existing home sales, Canada’s CPI, EU and China’s manufacturing PMI, and German economic sentiment. Here is an economic preview for January 19th to 23rd, 2015:
The main event from last week was the decision of the SNB to stop pegging its currency to the Euro. This news may have also provided the force needed to pull up gold and silver. The progress of U.S. treasuries yields may have also been impacted by the SNB decision.
The chart below shows the changes in the U.S. treasuries yields and the prices of gold in the past month.
Source of data: U.S. treasuries and Bloomberg
As you can see the drop in yields may have stemmed from the lower inflation, higher uncertainty in the financial markets, and economic slowdown – the World Bank revised down its outlook for the coming years.
As long as yields keep coming down, they are likely to drive further up the prices of gold. And since silver continues to follow gold – a recovery in the price of gold is likely to keep push up silver.
This week the main event will be the ECB monetary policy meeting. The meeting is likely to revolve around the upcoming QE program – what to expect and what are the details. Market expectations about the amount of QE are around 500-700 billion euros, but some analysts even predict that this number could, in theory, reach as high as 2 trillion euros.
The implications for the QE relate not only the Euro/USD but also the flow of investments: A weaker Euro could bring up the USD, which doesn’t help gold and silver. Conversely, the possibility of the printing press working overtime in Europe could drive the demand for investments such as gold and silver. The short term impact is likely to be with respect to current market expectations. But over the mid-term these developments could play in favor of gold and silver.
Other reports worth looking this week include: China’s GDP for Q4, manufacturing PMI and industrial production. The progress of China also plays two roles in bullion: The recovery in China’s economy plays in favor of gold and silver as the demand for metals may rise. But lower growth could also bring down U.S. T bills yields – which may pull up gold and silver. Of these two opposite directions, I think the latter has a bigger role in precious metals.
In North America and Europe we will have several monthly and weekly reports such as: Jobless claims, German economic sentiment, U.S. housing starts, German and EU manufacturing PMI, U.S. existing home sales, and Canada’s retail sales and CPI. These reports may have a secondary role to move financial markets.
By the end of last week, gold holdings in the GLD ETF jumped to 730.89 tons– 3.3% gain; it’s also up by 2.6% for the year.
Takeaway
Gold and silver have done well in the past few weeks driven by higher uncertainty in the markets, lower U.S. T bill yields and drop in CPI. The SNB’s recent move may have helped push up bullion prices, but this week’s ECB decision could also stir up the markets. If the ECB doesn’t come up with the expected numbers, this could bring back up the Euro, which may also curb down the recent recovery of bullion. Otherwise, we could see another devaluation of the Euro and more investors jumping back to gold and silver. My guess, gold and silver will keep climbing up.
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