Risk for gold and silver remains biased to the downside

Gold and silver ended the week again slightly lower. However, the PGMs rose once more as hopes for an end of the strike in South Africa were disappointed and the labor unrest continues. The two major economic events for the precious metals were the FOMC meeting and the US labor market report. But also the geo-political development in Eastern Europe played a role.

The decision of the FOMC to reduce the volume of monthly purchases of US Treasury notes and bonds as well of mortgage bonds by $5bn each should not come as a surprise. However, some market participants had feared the committee might express a less optimistic view about the US economy. This was not a rational assumption as the FOMC always stressed that the weaker economic data earlier this year was caused by the severe winter conditions in many parts of the country. According to the first estimate, the US real GDP grew at an annualized rate of 0.1% in Q1. This is still a remarkable achievement. The ISM manufacturing PMI increased further and came in at 54.9 after 53.7 the month before. Thus, the PMI rose stronger than the consensus of Wall Street economists predicted. It also indicates that the US economy expands again at a solid pace in the current quarter.

The FOMC decision and the economic data was well received in the stock market. Thus, it was not surprising that gold and silver headed lower for most of the week. But both metals pared most of the loss on Friday. One reason for the rebound was surprisingly the US labor market report. The number of new jobs created in April was far higher as expected. Instead of 215K additions to the payrolls in the non-farm sector, 288K persons found a new job. Also the figures of the two preceding months had been revised higher. Therefore, the pay-roll was about 100K higher than the consensus expected.

In addition, the unemployment rate dropped to 6.3% while the market expected only a decline by 0.1 percentage points to 6.6%. This decline was due to a lower labor force participation rate. However, we have pointed out several times that the baby boomers start to leave the work force as they retire. The negative part of the labor market report was the unchanged average hourly earnings. Some economists argued that this would limit the increase of private consumption. But the recent figures on personal spending released earlier in the week showed a strong increase of 0.9% on the month. The average hourly earnings of production workers increased by 0.2% on the month, which indicates that a broad part of the total workforce earned more and thus, could increase consumption accordingly.

Nevertheless, the labor market report was not well received in the stock market. However, it was not only the labor market report weighing on stocks and thus, helping gold and silver to recover. Also the developments in the Ukraine, especially in the City of Odessa, played a role. Safe haven government bonds pared the loss following after the release of the labor market report. German Bunds even returned back into the black. Also the precious metals profited from the flow into safe havens.

As long as economic data plays the major role, it seems that the risk for gold and silver are biased to the downside. This is also reflected by the development of gold holdings at the biggest ETF, the SPDR Gold Trust, which fell again in this past week by more than 9 tons to 782.85 tons. The release of the OSCE observers over the weekend might reduce fears of an escalating conflict in the Ukraine. This could be positive for stock markets and thus, weigh on gold and silver. However, as long as no peaceful solution is found, the geo-political developments could also lead to a (brief) rally in both precious metals.