Precious Metals Fall On Hawkish Fed

March 6th, 2017 by

Gold and silver prices started the week lower as the precious metals are charting a churning pattern of mostly sideways action of late. As of 11:00 am EST, spot gold was down 0.45% to just below $1,230/oz in New York while spot silver slid 0.8% to trade right at $17.80/oz.

This gradual consolidation is not entirely surprising given the nearly unanimous notion that the Federal Reserve will imminently be raising interest rates. What is surprising is that the metals have held onto almost all of their early-year gains in the face of a strong U.S. dollar.

Despite being among the global markets’ biggest winners of late, platinum and palladium prices were off about 1.3% and 0.5% today, respectively.

Interestingly, however, gold futures for April delivery were actually up 0.5% on Monday.

Fed Forecast Lifts Dollar

Fed Vice-Chair Stanley Fischer (photo: Federal Reserve)

Fed Vice-Chair Stanley Fischer (photo: Federal Reserve)

As the case for an interest rate hike has apparently grown more convincing as 2017 has progressed, the markets have calibrated their expectations accordingly. This adjustment has come swiftly: the CME’s FedWatch formula, based on the trading of federal funds futures, implies an 89% chance that the central bank raises rates at the upcoming FOMC meeting on March 15th. Less than a month ago, this measure was about 35%. For many investors and fund managers, this means that the most important near-term development affecting all sectors is to beware the Ides of March.

Perhaps the strongest correlation to higher interest rates is a stronger dollar. Thus, even speculation about the Fed raising rates has the effect of lifting the dollar. On Monday, the USD was firm but flat, trading at 101.5 on the DXY index. This was accompanied by less selling of gold and Treasurys than one would normally expect, however. The 10-year T-note yield actually dropped from Friday’s close of 2.50% to 2.48%, an indication of some demand. The negative response to the strong-dollar, higher-rate narrative by gold and silver has also been muted.

In general, commodities were higher this morning. Crude oil prices were actually just below unchanged, however. WTI crude and Brent crude traded at $53.20/bbl and $55.90/bbl, respectively.

European Markets

A confluence of troubling economic and political developments in Europe have thrown markets across the Atlantic into a state of some confusion. French bonds and the euro were dragged lower by the news that presidential candidate Francois Fillon, who is facing an investigation for embezzlement, will not be replaced by Alain Juppe in the upcoming election. The embarrassing ordeal for his center-right party opens the door even further for Marine Le Pen’s National Front to prevail in the elections. Le Pen has vowed to renegotiate France’s involvement in the common currency and the European Union in general if elected.

Elsewhere on the continent, shares of Germany’s largest bank, Deutsche Bank, plummeted after the firm announced plans to issue more stock in order to raise capital. The markets obviously took this as a sign of vulnerability.

Overall, European stocks in the financial sector have trailed behind their American counterparts due to these potential disruptions in France and Germany. The same is true of the increasingly contentious Brexit negotiations between Britain and Brussels, which will likely restrict Europe’s access to London’s financial center (and vice versa). Financials in the U.S. have led this year’s stock-market rally on expectations of deregulation and tax reform under President Trump. The euro last traded at $1.06, off of its lows.

On Alert In Pacific

north-korea-bomb-missile

Gold drew safe-haven demand in Asian markets after it was confirmed that North Korea launched several missiles into the Sea of Japan this weekend. The ongoing threat that North Korean aggression poses to American allies in the Pacific has strained relations between the West and China. This comes just weeks after the press leaked that the half-brother of North Korea’s Supreme Ruler, Kim Jong Un, was assassinated in Malaysia. Shares in Tokyo were 0.5% lower overnight.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.