Never a dull moment for bullion investors in the past months: Last week, bullion prices bounced back, even though other major commodities mainly in the energy sector kept coming down. The rally came when the FOMC, wait for it, didn’t change the monetary policy – were you surprised as me? But the market considered this statement a bit more dovish and as such the expectations for a rate hike in September were revised down. This week, the main event of the week includes the non-farm payroll report that will be released on Friday. Other events and reports to consider are: U.S. core PCE, factory orders, manufacturing PMI, rate decisions of RBA, BOE and BOJ. For the complete review for this week’s agenda see here.
The Federal Reserve still seems to be on the fence on the timing of raising rates, at least based on the recent statement. The FOMC meeting concluded with no dissenters and the wording was little changed. The Fed showed a bit more optimism about the labor market, but inflation is still down and will remain so for a while. The decision to raise rates will be – again to surprise here – data depended.
This news, however, may have dragged down the odds of a rate hike as derived from the bonds market: As of last week, the implied probabilities of rate hike in September went down from 19% to 0%; for December the chances are still 55% — unchanged.
The GDP for Q2 was also released last week: The growth rate was 2.3%, year on year – slightly lower than market expectations.
Looking forward, the non-farm payroll report will be released and could move the bullion market: The current expectations are for a gain of 224K, which is close the growth in jobs back in June. Last time, the precious metal market didn’t react to the news as it wasn’t far off market estimates.
Source: Bloomberg, BLS
In the past, there is a strong negative correlation between the deviation of the actual from market expectations in number of jobs added and the percent changes in bullion prices on the day the NFP report is released. So if we were to see a lower-than-expected growth in jobs, this could push back up gold and silver prices. The last time there was a big miss that drove up bullion prices was back in April regarding the March report. For now, it doesn’t seem likely that we will see a sharp drop in jobs to below 200K.
Last week, the USD wasn’t much of factor in moving bullion prices. Because the USD remained nearly flat against major currencies.
By the end of the previous week, gold holdings in the GLD ETF fell again by 1.1% to 672.7; The ETF’s gold holding are down by 5.5% for the year, year-to-date.
What’s next?
The recent recovery in the bullion could be short lived. The market has adjusted to the lower possibility of a rate hike in September – let’s face it, it wasn’t so high to begin with. But if the upcoming NFP report doesn’t meet again market expectations, we could see another bounce in gold and silver prices. This scenario, however, isn’t likely and therefore it’s more plausible to see bullion prices resume their downward trend they have experienced in the past few months.
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