Despite the slow week we had in the financial markets with no big event or news release, the gold market took another hit with a flash crash at the beginning of the week. By the end of the week, gold shed 4% off its value and silver 2.3%. Gold and silver reached a new low of $1,085 and $14.5, respectively. Precious metals could take another hit if the FOMC were to present another hawkish report and set the stage for a rate hike in September. For now the market doesn’t place a high chance for September. Will China drive higher gold demand? China has been purchasing gold at fast pace but not much faster than the pace it has been adding foreign exchange reserves. And China is more likely to ease down its purchase spree considering its economic conditions. This week, gold and silver prices will be driven by news coming from the U.S. Besides the FOMC meeting, the GDP for Q2 will also be released. Other U.S. reports include: Consumer sentiment, core durable goods and pending home sales. For the complete breakdown for this week’s events and reports see here. So is the bullion market set to take another downward step?
Even though last week didn’t entail any big headlines in the financial markets – we did have a continuous coverage of the Greek debt crisis and China’s economic slowdown but no major headlines – the bullion market did experience a flash crash earlier in the week. Some suspect it was related to a sell off of gold in the Chinese financial markets. In any case, gold has reached a four year low and is currently trading close to the $1,000 mark.
Another push to gold could be if the FOMC were to present another hawkish statement this week. A possible rate hike in September is still plausible, even though the markets place a relatively low chance of such a move.
The FOMC will convene again for the fifth time this year and this time the meeting will be close the release of the first estimate of the GDP for Q2.
Source: BEA and Bloomberg
In the past, the GDP report didn’t always have a strong impact on the price of gold, as you can see in the chart above. But in any case, as we are getting closer to the rate liftoff, any indication of the progress of the U.S. economy could have an indirect adverse impact on gold and silver.
The FOMC members are also likely to have beforehand the results of the growth rate of Q2. If the FOMC members were to see a better than expected GDP for Q2 – the current estimates for Q2 are around 2.7% — this could slightly tilt the scales towards raising rates sooner rather than later. The FOMC members may also address the developments in Europe and China and the impact, if at all, of this news on their decision vis-à-vis the Fed’s monetary policy.
Source: FOMC and Bloomberg
As of the end of previous week, the implied probabilities in the bonds market didn’t change much: The probability of a rate hike in September is now 19% — a modest gain from the previous week — and for December the chances are 55% — slightly lower than before.
By the end of last week, gold holdings in the GLD ETF also tumbled down by 2.31% to 680.15; The ETF’s gold holding are down by 4.5% for the year, year-to-date.
China was also in the news when it comes to gold as it has finally presented an update on the gold hoards the country has accumulated in the past few years – the last update was back in 2009. The recent update showed that China’s gold hoards went up from 1,054 tons to 1,658 tons – this puts China at the top five countries in the amount of gold they hold. So perhaps China was among the main players in keeping the price of gold high. But as I have pointed out in the past, China’s economic growth is fragile and keeping a high surplus in the current account isn’t a simple task. So China – which has augmented its foreign reserves by 83% between 2009 and 2015 and has started to cut down its reserves in the past year – isn’t likely to further augment its foreign reserves and this could include gold. Gold still accounts for a very small portion of its total foreign reserves – roughly 1.5%. Therefore, China isn’t likely to be the one to drive up the price of gold or silver.
So gold and silver are going down?
The weakness in the gold market isn’t something new. Only now it seems the gold bulls are catching up with the downward direction of gold and silver. Nonetheless, precious metals could see a modest rally if the FOMC were to present a dovish tone in the statement or the GDP for Q2 doesn’t meet market estimates with a much lower than expected growth rate.
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