The recovery of gold and silver slowed down as two forces moving in opposite directions impacting precious metals prices: The rally of USD – dragging down PMs – and the rise in global economic gloom as reflected by lower long term interest rates – pulling up bullion prices. Also, the market expects now that the Fed will raise rates only once, which also pushed down LT treasury yields. These opposite forces seem to have kept gold and silver from soaring. Will gold and silver start picking up again this week? How will the upcoming ECB rate decision move PM prices? For gold and silver, the U.S. CPI, China’s GDP and U.S. housing figures could also move PMs. Let’s review what’s up ahead for gold and silver for the week of January 18-22:
The upcoming ECB rate decision will be the main event of the week. The market doesn’t expect any major changes this time; but if the ECB releases a more-than-expected dovish statement, this could bring down the Euro, which could also pull down PM prices. But will the ECB change its policy? At this point – especially after the last underwhelming rate decision – it seems unlikely. Therefore, the main focus will remain China’s woes and progress of the U.S. economy. If China’s economy keeps markets unrest, this could serve well the rising demand for precious metals, which, as former FOMC Chair Bernanke pointed out, are considered a protection against “tail risk” – an unlikely low probability risky event (e.g. the fall of U.S. economy into rescission back in 2008). Also, these developments have reduced, as indicated below, the market’s outlook for the cash rate of the Fed by the end of the year. Again, low LT interest rates are also likely to help pull up gold and silver. But let’s not forget. This time, the concerns are coming from outside of the U.S. so the U.S. dollar is actually appreciating – a move that is curbing down the rally of gold and silver. That’s why bullion are stuck between rising U.S. dollar and falling yields. What will prevail? My guess that in the short run, a fall in LT yields could help push up PM prices and perhaps even offset the adverse impact of a stronger U.S. dollar – although the progress will be very choppy with a seesaw motion as we saw in the past several days.
PM ETFs and Fed’s rate decisions
According to the latest update by Fed-watch, the implied probability for a rate hike in March sharply dropped to 28%; and 50% in June 2016. By the end of the year, the market estimates the Fed’s cash rate will be, on average, 0.6% — which implies only one rate hike. The upcoming CPI could shed some light on the progress of inflation and how that will influence FOMC members’ decisions.
In terms of ETFs holdings: By the end of the previous week, gold holding of the gold ETF SPDR Gold Trust (GLD) rose again by 1.3%, week on week, to 657.92 tons of gold. While silver holdings for the silver ETF iShares Silver Trust (SLV) fell again by 0.5% to 314.94 million ounces.
Takeaway
The rally of precious metals came to a halt last week as the U.S. dollar appreciated against major currencies excluding the Yen. This seesaw motion is likely to progress this week. The concerns over China are likely to remain, which will drive down equities. But they are also likely to push down long term interest rates – a shift that could behoove, even if for a short term, gold and silver. The thing that could tilt the scales for PM is what the ECB will do next. If the ECB comes out dovish – more than expected – this could bring down the Euro/USD; and this could also have an indirect adverse impact on bullion. But I think the ECB won’t rock the boat this time so expect the news from the U.S. – mostly CPI and housing data – along with the developments from China – including its GDP and industrial production – to move PM prices.
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