Precious metals got a modest boost following the dovish FOMC meeting statement, which also dragged down the implied probabilities of a rate hike in the coming months. Even though the Greek debt crisis keeps the door open of Grexit, which could have a significant impact on foreign exchange rates and financial markets in general, the main issue, for bullion, is likely to remain the U.S. monetary policy and Federal Reserve. For now, the Fed is still on course to raise rates this year, at least based on the current available data, so precious metals aren’t out of the woods just yet. If the economic data show the U.S. economy is progressing at a faster pace, this could raise the odds of possible lift off perhaps as soon as September. The economic data to consider this week include: update on GDP for Q1, core durable goods, new home sales, consumer sentiment, and core PCE. In Europe, all eyes are set towards the EU Summit and Euro Group meetings: The Greeks will have to get another bailout of 1.5 billion euros by the end of the month or else it will default on its debt to the IMF. This story will likely to crowd out other reports and events such as China’s flash manufacturing PMI, EU M3, and German business climate. Here is a preview for June 22-26, 2015:
Following the recent FOMC meeting, the bullion market’s reaction was mostly positive as the tone of the statement of press conference that followed was mostly dovish.
Source: Bloomberg, FOMC website
Even though the Fed’s decisions move the prices of gold and silver, the latter have remained relatively this year so far. The markets are still seeking for the direction of interest rates, which have gone up in the past year only to come back down. They have started to rise again, but it’s still too soon to call it in either way. As long as rates remain low, precious metals benefit from these low levels and don’t tumble.
As of the end of last week, the implied probabilities in the bonds market dropped so that the probability of a rate hike in September fell to 12% and only 50% in December. If the U.S. economy shows strong figures this week, the odds could climb back again.
The situation in Greece also plays a role in the progress of the Euro and level of volatility in the markets. If in the past, a possible Grexit was nearly impossible to consider, now it have become more plausible, albeit still unlikely, scenario. The gap between the Greeks and holders of Greek debt – mostly EU countries led by Germany – is still too wide on austerity measures including reducing pensions. But it still seems that in this Mexican Standoff the Germans have a bit more to lose than the Greeks from a possible Grexit. Although let’s not forget that according to recent polls, the Greeks still favor the strong Euro over a potential very weak drachma. So we are back to a Mexican Standoff…
For precious metals, the Euro rallied against the U.S. dollar, which actually benefits bullion prices. If the Euro keeps rising, which may occur as the odds of a Grexit rise, gold and silver, via the devaluation of the U.S. dollar, could further benefit from this development.
By the end of last week, gold holdings in the GLD ETF fell in seven of the last eight weeks. This time they declined by 0.30% to 701.9; The ETF’s gold holding are down by 1.5% for the year, year-to-date.
So where do we go from here?
The FOMC, as expected, didn’t offer too much more information than before and left us wanting hungry for more. Until we do receive a clearer guidance, the market will keep looking at the changes in the U.S. economy via the coming reports: The GDP for Q1, change in PCE and core durable goods. If we see better results than expected, this could raise again the odds of a rate hike in September, which could pressure back down gold and silver. The uncertainty around Greece could also play a role in moving precious metals via the changes in the U.S. dollar against the Euro. But the bottom line, we are likely to keep seeing high volatility with little movement from the current benchmark of $1,200 and $16 for gold and silver, respectively.
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