Blog posts tagged with 'fed'

Gold’s focus this week is squarely on the FOMC meeting. The two-day meeting begins on Tuesday with the policy announcement and Chairman Powell’s press conference set for Wednesday.

 In the eyes of the market, a 25-bps rate hike is a foregone conclusion. Fed funds futures reflect a probability of 98.3%. That is largely the result of the ongoing tempering of U.S. inflation data.

June CPI data showed a full-point drop in annualized consumer inflation to 3.0% from 4.0% in May. June PPI fell to 0.1% y/y, versus a downward revised 0.9% y/y in May.

The market is widely anticipating that Fed will pause after this week’s hike. The target rate is then most likely to remain at 5.25% – 5.5% into Q1-2024. However, the policy statement will undoubtedly state that the rate path will be data-dependent.

What comes next though? Arguably growth risks remain in light of the rather dramatic series of rate hikes over the past 16 months. On the other hand, Vincent Deluard of StoneX believes we “should brace for second and third inflationary waves, as was the case in the 50s and 70s.”

The yellow metal set a 9-week high last week shy of the $2000 level, buoyed by a weaker dollar. The dollar index tumbled to a 15-month low on the belief that the Fed is on the verge of pausing, while other major central banks will continue their tightening campaigns.

While gold and the dollar have adopted corrective tones in more recent sessions, I see this as primarily associated with position squaring ahead of the Fed decision. If the policy statement is in line with expectations ­– without an over-the-top emphasis on data dependency – the dominant trends should resume.

Silver

Silver closed down 1.3% last week. It was the first lower weekly close in four.

A key reversal did form on Thursday last week, so it was not surprising to see downside follow-through late last week and into Monday. Here too, we suspect some profit-taking ahead of the FOMC meeting.

Heightened growth risks may be putting some pressure on the more industrial metals as well. Preliminary US manufacturing PMI for July came in better than expected at 49, but the indicator appears on track for a third consecutive month of contraction.

Meanwhile, services PMI slumped to 52.4, well below expectations of 54. It was the sixth straight month of expansion, but the slowest pace since March.

According to the report: “The overall rate of output growth, measured across manufacturing and services, is consistent with GDP expanding at an annualized quarterly rate of approximately 1.5% at the start of the third quarter. That’s down from a 2% pace signaled by the survey in the second quarter.”

While economic growth slowed in July, there are plenty clinging to the notion of a soft landing. Let’s just say that my confidence in the Fed’s ability to orchestrate such an outcome is not particularly high.

I’m also somewhat concerned about the ongoing lack of investor interest, despite the (near-perfect) 78.6% retracement of the May-June decline. ETF outflows last week totaled 6.4Moz, leaving net holdings down more than 2% YTD.

The longer-term supply/demand fundamentals remain broadly favorable, and setbacks are likely to be viewed as buying opportunities.

PGMs

Platinum fell 1.1% last week but not before establishing a 5-week high at $998.43. The inability of the market to regain $1000 leaves the upside limited while the market awaits the Fed’s decision.

Consolidative range trading persists. A rebound above $1000 would set a more favorable tone within the $564.70/$1339.35 range.

Palladium remains defensive near 4½-year lows.

Non-Reliance and Risk Disclosure: The opinions expressed here are for general information purposes only and should not be construed as trade recommendations, nor a solicitation of an offer to buy or sell any precious metals product. The material presented is based on information that we consider reliable, but we do not represent that it is accurate, complete, and/or up-to-date, and it should not be relied on as such. Opinions expressed are current as of the time of posting and only represent the views of the author and not those of Zaner Metals LLC unless otherwise expressly noted.

Gold remains defensive below the $2000 level as ongoing strength in the labor market keeps the threat of inflation highlighted. That in turn makes it difficult to rule out further rate hikes.

U.S. nonfarm payrolls for May came in at a solid +339k, well above market expectations of +193k, versus a positively revised +294k in April. While the unemployment rate rose to 3.7%, strength in the payrolls numbers diminishes the likelihood that a recession is impending.

This also seems to provide some additional leeway for the Fed to further tamp inflation with another rate hike this month, although that’s not really being reflected in Fed funds futures yet. The CME’s FedWatch tool puts the probability of a 25-bps rate hike at 24.1% as of Monday.

The resolution of the latest debt-ceiling standoff has taken some of the haven bid out of gold. While default has been averted, there doesn’t seem to be any palpable sense of relief.

The debt ceiling has been suspended until January 2025, allowing Treasury to borrow as much as it wants until the debt ceiling is reinstated. The CBO projects total debt held by the public to grow to $27.4 trillion by the end of 2024 and exceed 100% of GDP. Gross debt is expected to be north of $34 trillion.

By the end of 2033, total debt held by the public is projected to rise to $46.4 trillion, and 118.2% of GDP. Gross debt at the end of 2033 will be approaching $52 trillion.

Those numbers and that chart – especially the trajectory – are reasons for considerable concern. The debt and the servicing costs are an ever-growing millstone around the neck of economic growth potential.

While this is certainly a grim reality for the U.S., the explosion of debt is a global phenomenon.

A recent report by the consultancy group McKinsey found that since 2000, “Globally, for every $1.00 of net investment, $1.90 of additional debt was created.” This was largely due to rising debt levels and quantitative easing (money printing). During 2020 and 2021, “The creation of new debt accelerated to $3.40 for each $1.00 in net investment.”

That’s pretty staggering. Not surprisingly, investors are wondering where they can turn to safeguard their wealth. A recent Bloomberg survey showed that 52% of professional investors and 46% of retail investors picked gold as their top safety choice. Treasuries were a distant second at 14% and 15% respectively.

According to a Gallup poll gold has vaulted into second place for the best long-term investment, behind real estate. According to the poll, gold is now comfortably favored above stocks/mutual funds, Savings accounts/CDs, and bonds.

It’s worth recalling that the world’s central banks have been buying gold voraciously. Central Bank gold buying reached a record 1,078 tonnes in 2022. This year is off to a strong start as well, with Q1 demand hitting a record 228 tonnes, 34% higher than the previous Q1 record set in 2013.

While much has been said in recent weeks about gold weakness stemming from a stronger dollar, keep in mind that the yellow metal is only about $100 (less than 6%) off its all-time high of $2075.28. Savvy investors will likely view short-term setbacks as buying opportunities.

Silver

Silver ended May with a loss of 6%. It was the first lower monthly close in three, as uncertainty over the debt ceiling and growth risks worried investors.

Resolution of the debt ceiling crisis – or perhaps more accurately forestalling of the real crisis – along with optimistic economic data may help put a floor under silver. Supply and demand fundamentals remain broadly supportive, but investors remain reticent.

Silver ETF saw outflows of 2.5 Moz last week. Holdings declined by 838 koz on Friday alone, even after the impressive NFP beat.

Additional retracement of the recent losses is needed to re-instill a measure of confidence in the scenario that calls for an eventual retest of the $30 zone. A rise back above $24.50 might spark some interest among those investors.

What those investors should really be looking at are the realities of incredibly strong demand in just about every sector of the physical silver market. At the same time, the market is in deficit and is projected to remain in deficit for the next five years.

That bodes well for the longer-term outlook which should carry silver to new record highs. It’s a pretty compelling story for investors, but they just aren’t paying attention at this point.

PGMs

Platinum is maintaining a corrective stance, although Monday’s rebound offers some encouragement. The industrial metals didn’t like the strong nonfarm payrolls number on Friday as it heightened the possibility of further Fed rate hikes.

While total vehicle sales dipped in May to 15.6M from 16.6M in April, the general trend seems to suggest the potential for a return to the pre-pandemic level of around 17.5M units.

I remain cautiously bullish on platinum. If the U.S. can avert a recession, as suggested by persistently strong incoming data, scope is seen for a near-term retest of $1200.

Palladium continues to bounce along the bottom, within striking distance of the 4-year low at $1329.18.

Non-Reliance and Risk Disclosure: The opinions expressed here are for general information purposes only and should not be construed as trade recommendations, nor a solicitation of an offer to buy or sell any precious metals product. The material presented is based on information that we consider reliable, but we do not represent that it is accurate, complete, and/or up-to-date, and it should not be relied on as such. Opinions expressed are current as of the time of posting and only represent the views of the author and not those of Zaner Metals LLC unless otherwise expressly noted.

In our opinion, the gold market has probably forged an intermediate top with a major blowoff range-up reversal overnight. In other words, optimism about the potential for an end to the US rate hike cycle has been embraced and perhaps overdone.

From a fundamental perspective, Indian gold prices posted a record high overnight and in the past Indians have been very price conscious which in turn could result in a near-term demand void.

However, the gold market should be supported by another inflow to gold ETF holdings of 24,688 ounces yesterday as that narrows the year-to-date decline in holdings to only 0.2%...[MORE]

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Gold slid more than 1% last week, logging a second consecutive lower weekly close. The yellow metal is being weighed by heightened expectations for another Fed rate hike in May, while geopolitical and growth risks are limiting the downside thus far.

Focus is already on next week’s FOMC meeting, where another 25-bps rate hike is widely expected. The CME’s FedWatch tool places the probability at 92%. The odds for an additional 25-bps hike in June continue to edge higher and now stand at 24.1%.

The Fed seems to think they have more to do on the inflation front, even as the market’s expectations for inflation continue to moderate. The index of common inflation expectations fell to 2.22% in Q1, the lowest level since Q2-21.

Meanwhile, incoming data continue to suggest the economy is slowing. The minutes from the March FOMC meeting revealed that even the central bank’s staff believe a mild recession will begin “later this year, with a recovery over the subsequent two years.”

In addition, job growth slowed in March and is forecast to come in weaker yet in April. Median expectations for nonfarm payrolls are +175k, down from +236kn in March.

A recession would certainly knock inflation lower, as would slower jobs and wage growth. However, the market seems to believe the Fed won’t wait for any of that to happen and will instead remain aggressive in battling price risks. That strategy does not bode well for a soft landing.

With gold trading less than 4% off its all-time high of $2075.28, the yellow metal is arguably well positioned to push to record highs if the Fed (and other central banks) are put in the position of having to reverse course and start easing policy. My first significant technical objective would be $2194.58 based on a Fibonacci projection.

Last week I suggested short-term downside potential was to $1959. So far, the market has traded as low as $1969.30. There is scope for further tests of the downside until the next policy announcement on May 3^rd, particularly if prospects for a June rate hike continue to increase.

Silver

Silver ended last week with a 1.1% loss, but a firmer tone prevailed on Monday. Thus far, the white metal is holding its 20-day moving average.

While the trend remains favorable, rising economic growth risks warrant a measure of caution. Silver ETFs saw significant outflows last week, suggesting that investors may lack confidence in the fundamentals needed to push silver back to the critical $30 zone.

A recession later in the year could result in a significant retracement of the March-April rally, but I also suspect the Fed will be quick to start cutting rates in reaction. That would help limit downside potential as will the more favorable economic prospects for China as the world’s second-largest economy continues to recover from COVID lockdowns.

Last week, the Silver Institute highlighted that “all major demand categories achieved record highs in 2022.” Total silver demand jumped 18% y/y to a record 1.242 billion ounces.

Amid this strong demand environment and a marginal contraction in mine output, the supply deficit reached 237.7 Moz in 2022. The Silver Institute called it "possibly the most significant deficit on record."

The Silver Institute is projecting that the silver market will remain out of balance in 2023, to the tune of 142.1 Moz. If confirmed, it would be the third consecutive annual supply deficit, which should help underpin the market.

Renewed probes about $26 would return focus to the $26.95 high from March 8, 2022. The latter is seen as the trigger that would put the key COVID-era highs at $29.86/$30.14 in play.

On the downside, a violation of the 20-day SMA at $24.83 would shift attention to congestive support around $23.70, which corresponds with the 38.2% retracement level of the rally from $19.90. Short-term losses are still seen as corrective in nature.

PGMs

Platinum surged nearly 8% last week, establishing a 13-month high at $1143.25. It was the sixth consecutive higher weekly close.

However, platinum had become quite overextended, the most since December 2020. Corrective pressures emerged on Monday, resulting in a loss of 3.6%.

At this point, I’m viewing this week’s setback as corrective.  While mounting growth risks do have the potential to take the wind out of platinum’s sails, supply and demand fundamentals are likely to limit the downside.

Persistent power issues in South Africa should keep supply tight. The deficit is expected to reach 556 koz this year.

On the demand side of the equation, global light vehicle sales are expected to increase by 6.2% in 2023 to 86.1 million units. The China Association of Automobile Manufacturers (CAAM) is projecting a 3% bump in Chinese sales to 27.6 million units. That would be nearly a third of projected global sales.

CAAM is anticipating that demand for “new-energy” vehicles will increase by 35% to 9 million units. That will do more for silver and copper than platinum.

While auto sector supply chain issues are still likely to be a problem, ongoing platinum for palladium substitution and increased loading in catalytic converters should help to underpin platinum.

Despite 6-weeks of gains in palladium, the chart suggests the gains were corrective in nature. Recent probes above the 100-day SMA could not be sustained and palladium retreated more than 4% on Monday.

A retreat below $1489/87 would return a measure of credence to the dominant downtrend, returning focus to the $1329.18 low from March 9^th.

Non-Reliance and Risk Disclosure: The opinions expressed here are for general information purposes only and should not be construed as trade recommendations, nor a solicitation of an offer to buy or sell any precious metals product. The material presented is based on information that we consider reliable, but we do not represent that it is accurate, complete, and/or up-to-date, and it should not be relied on as such. Opinions expressed are current as of the time of posting and only represent the views of the author and not those of Zaner Metals LLC unless otherwise expressly noted.

Gold closed down 0.2% last week but not before a new 13-month high was attained at $2048.79. A corrective tone persisted early in the new week amid speculation that the Fed will hike rates again in May, even as inflation continues to slow.

Both CPI and PPI came in below expectations in March. PPI posted its biggest monthly decline since April 2020.  With inflation concerns waning, so too does a significant bullish catalyst.

Nonetheless, there is a growing expectation that the Fed will hike interest rates at the May FOMC meeting. Based on the CME’s FedWatch tool, the probability of a 25-bps hike now stands at 91%, that’s up from 72.2% last week and 20.7% a month ago.

Assuming the Fed does indeed tighten in May to the 5.00-5.25% range, the market believes they will hold steady in June. There is however an 18% probability of another 25-bps high in June.

Keep an eye on EU and UK inflation data this week. Hot numbers would likely prompt the respective central banks to maintain their bias toward tighter policy with the potential to further narrow interest rate differentials.  

Providing some additional weight on gold is the fact that the dollar held a significant support level. The low from February 2 in the dollar index at 100.82 was ever-so-slightly exceeded on Friday last week but may be considered technically intact.

While the subsequent rally hasn’t been terribly impressive, a case can be made for a potential double-bottom. The confirmation point for that pattern is the 105.88 high from March 8, which is not in any immediate jeopardy.

The dollar has pressured its 20-day SMA already and penetration would clear the way for additional gains toward the 103.50 zone, where the 100 and, 200-day SMAs converge with the 50% retracement level of the latest leg down.

Such gains in the greenback would likely keep the pressure on gold. Short-term potential is back to the $1959 level, but such a move would be seen as corrective. My sense is that there are quite a few interested buyers feeling the market got away from them.

While there are reports that the recent higher prices have tamped Asian demand, I still believe there is potential for a near-term challenge of the all-time high at $2075.14.

Global gold ETF inflows were 164,805 ounces last week. It was the fifth consecutive weekly inflow, but holdings are still 0.3% lower YTD. We’ll be watching closely to see if more buyers come in on the break or if the recent longs are weak.

Silver

Silver gained 1.6% last week, it was the fifth consecutive high weekly close for the white metal, which probed above $26 for the first time since April of last year.

A softer tone prevailed on Friday into Monday, taking out nearby trendline support. Scope is seen for additional short-term losses back to the 20-day SMA at $24.25. Secondary support is marked by the 38.2% retracement level of the recent leg higher at $23.72.

The IMF now forecasts global growth of 2.8% in 2023, down from 3.4% in 2022. They believe China and India will account for more than half of that growth.

The IMF then sees the global economy averaging around 3% growth over the next 5 years. That’s well below the 3.8% average that was achieved in the previous 20 years.

That outlook doesn’t bode terribly well for industrial metals, and yet I suspect much of the growth that is realized will be driven by technology and the strong trend toward electrification. Silver should fare well in such an environment, even if the overall pace of global growth is weak.

Last week the Biden administration announced a plan to significantly increase vehicle emission standards beginning with the 2027 model year, projecting that 2/3rds of all vehicles sold in the U.S. would be EVs by 2032. That’s less than 10 years from now!

Whether such lofty goals are even remotely feasible remains to be seen, but it does seem likely that EVs will continue to gain market share. On average, EVs contain about 44% more silver and 2.5 times more copper than conventional vehicles.

PGMs

Platinum posted a 4% gain last week, notching a fifth consecutive higher weekly close. While gold and silver were defensive to start the week, both platinum and palladium displayed some buoyancy on Monday.

While platinum remains well within its range, the recent strength seems to defy the tepid global growth prospects and the Biden administration’s push to get rid of most vehicles powered by internal combustion engines.

Fewer ICE vehicles will ultimately result in diminished demand for auto catalysts. However, the market may have latched on to the expectation that emission standards will continue to be more stringent in the intervening years, requiring greater PGM loading.

Palladium has rallied about 18% since the $1329.18 low was set on March 9. A move above the 100-day SMA at $1612.66 would suggest potential back to $2000.

Non-Reliance and Risk Disclosure: The opinions expressed here are for general information purposes only and should not be construed as trade recommendations, nor a solicitation of an offer to buy or sell any precious metals product. The material presented is based on information that we consider reliable, but we do not represent that it is accurate, complete, and/or up-to-date, and it should not be relied on as such. Opinions expressed are current as of the time of posting and only represent the views of the author and not those of Zaner Metals LLC unless otherwise expressly noted.

Gold ended last week with a gain of 2.5%. It was the first higher weekly close in 3 weeks.

The outside week (lower low, higher high) has some bullish technical implications, but the market failed to generate any upside follow-though on Monday. Traders are exhibiting caution ahead of Fed Chairman Powell’s testimony this week before Congress, and February jobs data that comes out on Friday.

While Powell is likely to highlight recent successes in tempering inflation, higher prices in January will likely prompt him to reiterate the need for ongoing tight monetary policy. Markets will hope to hear some optimism about Fed efforts to orchestrate a soft landing.

Much of that optimism stems from persistent strength in the jobs market, particularly after the huge payrolls beat in January.  Median expectations for February nonfarm payrolls are +223k. That’s less than half of January’s payrolls increase of 517k, but still a pretty respectable number.

Powell’s tenor and the jobs report should set gold’s short-term tone heading into the next FOMC meeting on March 21-22. While a 25-bps hike is still favored (68.6%), the probability for a 50-bps hike continues to edge higher, and now stands at 31.4% versus 24% last week.

The gold market’s focus remains squarely on the ebb and flow of monetary policy expectations, and the resulting movements in interest rates and the dollar. However, if it becomes evident that rate hikes alone can’t contain inflation, gold may rally on flight to quality in anticipation of stubborn inflation and heightened risks of a recession.

The bulls continue to pay considerable attention to feverish central bank gold demand, which reached a record 1,136 tonnes in 2022. This year is off to a good start with 31 tonnes of gold purchased by central banks in January. Turkey and China were notable buyers.

Reserve diversification, primarily out of dollars and Treasuries, appears to be the primary motivation for this gold buying. The rise in the use of sanctions also has many countries concerned about the liquidity of their reserve assets so they are shifting to something that is supremely liquid and tends to perform well in times of economic and geopolitical uncertainty.

Individual investors should consider following their lead.

Silver

Silver rebounded 2.5% last week, ending the string of lower weekly closes at six. While a simple hook reversal is evident on the weekly chart, the lack of upside follow-through on Monday suggests the downside remains vulnerable.

Like gold, silver adopted a consolidative tone on Monday as the markets eagerly await Powell’s initial testimony before the Senate Banking Committee on Tuesday. He’ll be back on the Hill on Wednesday to testify before the House Financial Services Committee. After that, the focus will shift to Friday’s jobs report.

Silver is likely being weighed to some degree by disappointment that China failed to announce a major stimulus program at the beginning of the National People’s Congress in Beijing.

China is targeting “around 5%” growth in 2023 but will apparently rely on a consumer-driven rebound. That’s only a modest increase over the 3% growth seen in 2022, which was the lowest GDP reading since 1976.

There are worries that without an influx of stimulus, Chinese consumers will remain cautious. Demand for consumer electronics and electric vehicles – which contribute significantly to silver demand – would likely remain soft.

Kitco reported on Monday that for the first-time auto manufacturers were at the BMO Global Metals, Mining, & Critical Minerals Conference. The implication is that auto companies might be interested in making moves to bolster their supply chains. That could include buying silver mines.

“If I were Elon Musk, I’d be very active in this area.” – Keith Neumeyer of First Majestic Silver

Neumeyer cited Silver Institute data that projects a 200 Moz deficit in the silver market this year, driven largely by heightened demand from both the auto and solar sectors. He went on to project a silver price north of $100 in the medium to long term.

PGMs

Platinum surged 8.3% last week, snapping a 7-week losing streak. A key reversal formed on the weekly chart, suggesting potential for short-term tests back above $1000.

We may see some consolidation ahead of Powell and the jobs data, and the lack of Chinese stimulus does not help the bullish cause. However, a better technical picture has developed.

Palladium remains defensive just off the nearly-3½-year low set late in February at $1353.04.

Non-Reliance and Risk Disclosure: The opinions expressed here are for general information purposes only and should not be construed as trade recommendations, nor a solicitation of an offer to buy or sell any precious metals product. The material presented is based on information that we consider reliable, but we do not represent that it is accurate, complete, and/or up-to-date, and it should not be relied on as such. Opinions expressed are current as of the time of posting and only represent the views of the author and not those of Zaner Metals LLC unless otherwise expressly noted.