Gold and Silver Weekly Outlook

[Samirofi]

Gold and Silver Outlook for January 4-8

The gold and silver market didn’t have a good year with a 10% drop in prices. Will 2016 be any different? A lot will ride, yet again, on the Federal Reserve policy. And this week we have two reports that could shed some light on this matter including the minutes of the December FOMC meeting and the non-farm payroll report. These reports could move not only the U.S. dollar but also precious metals prices.


Let’s start with the NFP. Currently, the market expects a growth in jobs of 202,000 – around the same level recorded back in November.



These numbers aren’t too impressive but are also good enough to maintain the positive outtake of the U.S. labor market. Looking beyond the headline figures, it’s important to examine the progress of “real unemployment”, participation rate and – even more important – the growth rate in wages. If the growth in wages – last month it reached an annual rate of 2.3% — doesn’t pick up and even declines, this may call into question the Fed’s rate hike. If the growth rates remains close to 2.3% and perhaps rises to around 2.5%, this will reinforce the Fed’s current policy.

For gold and silver, the last report didn’t hold back their prices from rising, even though the U.S. dollar slightly appreciated against the Yen. Precious metals tended to be strongly negatively correlated with the surprise in the headline figure – although the last report shows that when the surprise factor isn’t substantial this relationship doesn’t always holdup.


So unless there is a significant deviation from the NFP headline figure, gold and silver prices are likely to rally: Over the last two years, the surprise – either higher or lower than expected – in the headline jobs growth came below 15K jobs (in absolute numbers) on eight occasions. Of these times, in six of them gold and silver prices rose. In other words, in 75% of the time the PM prices rose when the surprise was very modest – regardless of the direction of the surprise.


The big picture is how these numbers and progress of the labor market shape the Fed’s monetary policy. This brings us to the minutes of the FOMC meeting. The minutes could provide more information about the FOMC’s members’ deliberations. If the minutes reaffirms the hawkish sentiment among Fed members, this could further bring down gold and silver prices.


According to the recent update by Fed-watch, the implied probability for a hike may in March is 56% – nearly unchanged from the previous week; and 78% in June 2016. By the end of the year, the market estimates the Fed’s cash rate will come below 1% — or around 2 hikes of 25bp. This is still below FOMC members’ outlook of 4 hikes.


The recent fall in bullion prices also coincided with the decline in bullion ETFs holdings: By the end of the previous week, gold holding of the gold ETF SPDR Gold Trust (GLD) decreased by 0.4%, week on week, to 642.37 tons of gold. And silver holdings for the silver ETF iShares Silver Trust (SLV) also fell by 0.3% to 317.9 million ounces.


Takeaway

This week, gold and silver are likely to be driven by the direction of the Fed’s policy and the U.S. economy. If the labor market keeps showing strong growth – perhaps even well above market estimates – and the minutes of the FOMC reaffirm the direction of the Fed for 2016 – i.e. raising rates at a steady pace of 0.25 bp every other meeting – these reports are likely to push down gold and silver prices.

[Samirofi]

Gold and Silver Outlook for January 11-15

The year started off with a lot of volatility mostly attributed to the selloffs of Chinese stocks. The growing concerns over what’s next for China pulled back up the demand for gold and silver. But then the NFP report came out on Friday –showing a gain of 292K in jobs, which was higher than expected – this brought back down gold and silver prices. Will this week entail additional gains for precious metals? Besides the NFP report and China’s woes that will keep resonating in the financial markets, among the main U.S. reports that will be release this week are: Retail sales, industrial production, PPI, consumer sentiment, and JOLTS. Let’s breakdown what’s next gold and silver for the week of January 11-15:


The recent NFP report was better than expected in terms of growth in jobs, but when it comes to wages – let’s just say it’s complicated. The annual growth in wages is around 2.5% — still in line with the past three months’ levels. But on a month-over-month basis, wages didn’t pick up. This doesn’t mean wages may not pick up again in the coming months, but it raises the question of whether we will see higher growth in wages moving forward.




After all, if the Fed subscribes to the whole idea behind long run vertical line Phillips curve and that the Non-Accelerating Inflation Rate of Unemployment or NAIRU, as explained by Larry Summers, is set at 5%. So any further stimulus when the natural rate of unemployment is at 5% — the current level – will only create higher inflation expectations without bringing down unemployment. Then this could suggest higher rates ahead – not a good sign for PM investors. The recent minutes of the FOMC didn’t offer much insight behind the last rate hike, but the Fed still seems convinced in raising rates several times in year. Summers, by the way, doesn’t believe that the right course of action only thinks that’s the model behind the Fed’s rate hike in December.


This week, the NFP report will continue to echoing in the markets and could keep driving down gold and silver prices, as it did back on Friday. The linear correlations between the surprise and bullion prices’ reactions are still strong and negative, which could shed some light behind the recent fall of PM prices.


Besides the NFP, the focus is likely to remain China and what’s next for the second largest economy. Anxiety in the markets and unrest in the Middle East over the dispute between Saudi Arabia and Iran are also developments that could push up the demand for gold and silver, which act as a long tail commodity in times of unrest in the markets. In the U.S. the main reports that will come out are retail sales, consumer sentiment, JOLTS, PPI and industrial production. The first two relate to consumer spending, the third addresses the progress of the labor market, the fourth is a proxy to inflation – albeit less important than PCE or CPI and the last one estimates production. If these reports show the U.S. continues to improve and the headline figures including retail sales and JOTLS reach or beat expectations, then they could pull back up the U.S. dollar and drive back down bullion prices.


ETFs and Fed’s future rate hikes


Based on the recent update by Fed-watch, the implied probability for a rate raise in March is down to 45%; and 66% in June 2016 – nearly 12pp lower than the previous week. By the end of the year, the market estimates the Fed’s cash rate will be, on average, 0.8% — this still implies a couple of hikes this year. If the U.S. labor market keeps showing progress, this could further raise this figure, which won’t behoove PM prices.


Following the high volatility in PM prices, ETFs holdings also shifted: By the end of last week, gold holding of the gold ETF SPDR Gold Trust (GLD) rose by 1.1%, week on week, to 649.59 tons of gold. While silver holdings for the silver ETF iShares Silver Trust (SLV) declined again by 0.5% to 316.36 million ounces.


Final point
Gold and silver – much like other commodities – had a turbulent week, which isn’t likely to fade away in the near term. Considering the week is starting off light on the news, markets are likely to continue to digest the NFP report along with speculating what’s next for China. If concerns over China continue to mount, it could, even if for a short term, help pull up PM prices. But if the focus will shift back to the U.S. and assuming the upcoming reports – mostly JOLTS and retail sales – don’t disappoint, then expect gold and silver to come back down as the U.S. dollar recovers.

[Samirofi]

Gold and Silver Outlook for January 25-29


Gold and silver prices slightly rose last week as the ECB promises more stimulus to follow, which could keep the U.S. dollar strong against the Euro. This week, the main event is the FOMC meeting that could impact the direction of gold and silver prices. The Fed is likely to refer to the recent market developments. Other main reports that will be released this week include: U.S. GDP for Q4 (first estimate), housing figures, consumer sentiment. So let’s breakdown what’s next for gold and silver for the week of January 25-29:

The ECB didn’t budge on its monetary policy, but the ECB President Draghi did promise more stimulus to follow in the coming months. He didn’t specify what kind of stimulus but we can assume it may include additional reductions to the deposit rate and augment the QE program. In any case, we could see the Euro continues to slide, which may, indirectly at least, keep pressuring down gold and silver prices – because if the USD appreciates against the majors, this doesn’t help commodities prices in general and precious metals in particular.

But let’s turn to the main event of the week: the FOMC meeting. This will be the first meeting for the year. The U.S. economy – at least the labor market – has shown signs of recovery. The concerns over China, weak retail sales, plunge in equities, additional fall of commodities are just some of the issues that the FOMC members will have to consider, even though these issues aren’t directly related to the Fed’s dual mandate. It’s still too early to determine whether the Fed’s recent rate hike was a mistake, but the current market conditions aren’t helping. And this could mean the Fed may postpose its rate hikes – based on the Fed’s dot-plot the next hike should have been in March. Based on recent market developments, the Fed should present a dovish statement to help calm the markets – at least as best as it can.




As of the end of last month, based on Fed-watch, the implied probability for a March hike slightly rose to 29%; for a June hike the chances were 39%. By the end of the year, the market still expects the Fed’s cash rate will be, on average, 0.67% — slightly more than one rate hike.

If the Fed releases a dovish statement – bear in mind there is no press conference or revised outlook this time – this could help, even if over the immediate term, push up gold and silver prices.

The other main report of the week is the GDP for Q4. This will be the first estimate. Currently the market expects a 0.8% gain. Even though the correlation between gold and the GDP surprise is next to zero, the USD/Yen and GDP surprise is positive at 0.52. And the correlation between USD/Yen and gold is also strong at -0.38. So there could still be an indirect relation between the GDP surprise and the direction of gold. In any case, the surprise of the GDP will be mostly important for the direction of USD and equities and less to gold and silver.




But it could be another factor that the FOMC members will take into account in their decision (they are likely to get a preview of the estimate). So if the GDP comes out even lower than expected, this could influence the FOMC members to postpone their decision to raise rates.
In terms of ETFs holdings: By the end of last week, gold holding of the gold ETF SPDR Gold Trust (GLD) rose again by 0.95%, week on week, to 664.17 tons of gold; silver holdings for the silver ETF iShares Silver Trust (SLV) declined by 1.1% to 311.6 million ounces.

Bottom line
Gold and silver didn’t do much last week, but they could resume their rally from the beginning of the year if the Fed winds up releasing a dovish statement. Also, if the bearish market sentiment, which has subsided by the end of the week, resumes, this could also drive up the demand for precious metals. But if the Fed doubles down and doesn’t backs off from its hawkish stance this could result in additional selloffs of precious metals.

[Samirofi]

Gold and Silver Outlook for February 1-5


Gold and silver prices rallied again last week but mostly at the start of the week before the FOMC released its statement, which was considered by many balanced. This week the NFP report could move gold and silver prices. But there is also news coming from China on manufacturing PMI – this could steer back the conversation towards the tribulations of China’s economy. And so far this year, the growing concerns over a global economic slowdown – in part due to direction of the Chinese economy – could drive back up, even if for a short term, the demand for precious metals. Other reports from the U.S. to consider this week including: manufacturing and non-manufacturing PMI, factory orders, and core PCE. So let’s examine what’s up ahead for gold and silver for the week of February 1-5:


As expected to Fed didn’t raise rates and addressed market volatility, low inflation rate and possible slower growth in the U.S. But the reaction for gold and silver was a bit, as presented herein, underselling. Perhaps bullion investors were expecting for a more dovish tone statement.




Following the rate decision, based on Fed-watch, the implied probability for a March rate raise fell to 15%; for a June hike the chances were lowered to 33%. By the end of the year, the market still expects the Fed’s cash rate will be, on average, 0.55% — less than one rate hike. And the chances of hike fell from 72% to 53%. So the market is less incline to believe there will be even a single hike in 2016.

The big event of the week will be the NFP report for January. After three solid reports that showed strong buildup in jobs, steady unemployment and rise in wages, all eyes will be to see if the NFP report starts to show slower growth or a possible reversal in job gains – the low GDP growth rate and disappointing consumer spending reports may start to show in the jobs reports. If so, this could further raise the chances of nary rate hike this year by the Fed – another short term boost for PM prices.

In terms of market reaction, as you can see below, the PM prices tend to react to surprises in the headline figure.


The linear correlation between the daily percent change of gold and the surprise in the NFP headlines figure is -0.49, which is a strong and negative correlation. So if the NFP shows a lower than expected gain in jobs – this week the market estimates a gain of 192K – then gold and silver prices may rise on Friday.
When it comes to changes in ETFs holdings: By the end of the previous week, gold hoards of the gold ETF SPDR Gold Trust (GLD) increased again by 0.76%, week on week, to 669.23 tons of gold – it’s up by 4.2% since the beginning of the year; silver holdings for the silver ETF iShares Silver Trust (SLV) fell again by 0.7% to 309.5 million ounces.

Final point

Precious metals rallied last week, but their recovery slowed down in the past several days: The Fed, as expected, experienced its concern over global economic gloom and low inflation, which could remain low for a while. This statement wasn’t enough to keep driving up gold and silver as it wasn’t too dovish or unexpected. This week, however, if the NFP shows lower than expected results and the bearish market sentiment, which has subsided in the last few days, returns – mostly if China’s economic woes get back to center stage – then PM prices could see further short term gains.