Precious Metals Drop as Fed Officials’ Remarks and FOMC Minutes Weigh on Market
Today, precious metals have experienced a significant price drop, with gold down by 1.2% and silver falling approximately 2% compared to Tuesday’s close. This decline aligns with a recovery in the US dollar. Several factors have influenced this movement: hawkish remarks from various Federal Reserve officials, the Reserve Bank of New Zealand hinting at another rate increase, and higher-than-expected UK CPI figures. These elements have prompted traders to take profits after gold reached a record high on Monday.
Silver, despite its major breakout above $30 last week, has shown limited upward momentum. However, it is premature to declare this the peak for metal prices. Some analysts suggest that silver’s breakout indicates it may just be starting a significant upward trend. For gold, more evidence is required to confirm a peak, as the current pullback might simply be a result of short-term profit-taking. My outlook for gold remains bullish, with an anticipated rise to $2500.
Gold Outlook: Metals Likely to Find Support on Dips
Gold and silver prices have received support from various factors this year, most recently a weaker dollar. Several weaker US macroeconomic indicators have emerged since April’s non-farm jobs report. Subsequent data releases have generally fallen short of expectations, signaling a slowing US economic recovery.
Today’s highlights include much weaker existing home sales and an unexpected build in crude oil inventories. Other disappointing reports this month include forward-looking manufacturing and services PMIs, as well as retail sales, building permits, and housing starts data. Even the latest inflation data came in slightly cooler.
If this trend of weaker macro data continues, it could lead to lower inflation and reduce the need for prolonged tight monetary policy. Additionally, the Fed’s tapering of its balance sheet runoff has been bearish for the dollar. Optimism over China’s economic outlook, driven by various stimulus measures, has also contributed to the metals’ gains. However, the primary drivers of gold’s gains this year have been inflation-hedging demand and central bank purchases, which are likely to persist, maintaining the bullish outlook for gold.
Hawkish Fed Commentary Limits Dollar Bears as Focus Shifts to FOMC Minutes
Despite its rebound this week, the US dollar has not returned to its April highs and remains negative for May. Thus, it could resume its downtrend as we move into the latter half of the week. With the US economy showing signs of weakening, maintaining a bullish stance on the dollar is challenging, especially after its gains in the first four months of the year against a basket of foreign currencies. If disappointing data continues, it could indicate a faster easing of inflation, lessening the need for extended tight monetary policy. Therefore, there is a risk that the Fed might be lagging behind.
Attention now turns to the minutes from the May FOMC meeting, which will offer insights into the Fed’s views on inflation. During the meeting’s press conference, Fed Chair Powell suggested that another rate hike this cycle was unlikely. The minutes will provide a more detailed perspective on the Fed’s assessment of inflationary risks. This follows several Fed officials’ emphasis on maintaining high interest rates for an extended period to control inflation.
Gold Outlook: Technical Factors and Key Levels
While today’s drop suggests a potential false break reversal against the April high of $2431, following two failed attempts to close above that level this week, the underlying trend remains strong. More evidence of a top is needed before turning tactically bearish on gold. Gold has already retested a key short-term support zone around $2385, where previous resistance and a short-term bullish trend converge. It is possible that gold may find support here before pushing higher again. The critical level to watch is $2332; a breach below this would be bearish. For now, the path of least resistance remains upwards, with an expected rally towards $2500 next.
1 Comment