A pivotal week for precious metals?

Last week finally brought some momentum back to precious metals, with gold and silver rallying sharply to levels last seen in early June. As we covered last week, much of that move came down to three sets of US employment data all pointing in the same direction - that the labour market appears to be cooling. This impacts precious metals because a weaker jobs market could make it harder for the Federal Reserve to justify raising interest rates when it next meets in September. Before the data arrived, markets were pricing around a 68% probability of a September rate hike, with that subsequently falling to around 57%, helping provide the spark for gold and silver's rally.

There was also some assistance from the Middle East, with fresh hopes emerging a week ago that an agreement could allow shipping through the Strait of Hormuz to increase once again. Oil prices subsequently retreated, potentially easing another source of inflationary pressure and further strengthening the argument for the Fed to keep rates unchanged.

For a few days at least, two of gold's biggest headwinds appeared to be easing simultaneously, but arguably this week is more important, as it could tell us whether that rally has further to run.

Hormuz provides another hurdle

Prospects of an imminent agreement over the Strait of Hormuz have faded somewhat since our last post, with both sides once again hardening their demands. Oil has consequently climbed back above $80, removing some of the optimism that helped precious metals last week. Interestingly though, gold has so far been restrained when reaction to the Middle East rather than significantly retreating, because as we have covered previously, its perhaps now more aligned with US interest rate and inflationary outlook.

Expectations for September interest rate decision remain finely balanced, meaning every new piece of information is being scrutinised for clues about the Fed's next move, with this week providing plenty of them.

First up: inflation

The most important release this week is arguably the latest Consumer Price Index (CPI), which will be released around midday (GMT) Wednesday.

Markets will be watching particularly closely for signs that underlying inflationary pressures are beginning to soften. A cooler-than-expected reading could further reduce expectations of a September rate rise and potentially provide another boost for precious metals, with a hotter reading doing precisely the opposite.

After last week's weaker employment numbers, CPI therefore provides the next major piece of the puzzle. If both employment and inflation appear to be cooling, the argument for keeping interest rates unchanged becomes considerably stronger.

Then come producer prices

Attention will then turn to the Producer Price Index (PPI) on Thursday lunch time (GMT). While CPI measures the prices consumers are paying, PPI provides an indication of inflationary pressures further up the supply chain. If businesses are facing higher costs, markets may conclude that some of those increases could eventually find their way through to consumers.

Once again, a hotter reading could strengthen expectations of a September rate increase, while softer figures could add further support to the narrative established by last week's employment data.

And finally, the consumer

Friday brings the latest US retail sales figures, providing another indication of the health of the American economy. Resilient consumer spending could give the Fed greater confidence that the economy is strong enough to absorb higher interest rates. Conversely, a meaningful slowdown, particularly alongside softer CPI and PPI readings, could further weaken the case for a September hike.

By Friday afternoon, markets should therefore have a considerably clearer picture than they do today.

Wait for the data, or the price?

And that creates a familiar dilemma for precious metal investors. Last week's rally demonstrated just how quickly prices can react when expectations change. With CPI arguably the most significant release of this week, and arriving first, a softer reading could add further momentum before the remaining data even lands. Equally, stronger inflation could quickly take some of the heat out of the rally.

Waiting until the end of the week provides more information, but potentially at a price that already reflects it, whilst moving beforehand means accepting greater uncertainty.

Nobody gets tomorrow's economic data today. The question for investors is how much certainty they're prepared to pay for.



Precious metal prices can be volatile and the value of your metal may go down as well as up. No responsibility can be accepted by Jewellery Quarter Bullion Limited for any loss caused by acting on information we have provided. We do not offer investment or tax advice and recommend that you conduct your own independent research before making any investment decisions.