Gold tumbled back below $2000 last week, weighed by a second consecutive higher weekly close in the dollar. The greenback has been buoyed by stronger-than-expected U.S. economic data, which leaves some potential that the Fed will hike rates again in June.
Fed Chairman Powell indicated last week that the ongoing banking crisis may prompt banks to curtail lending, slowing the economy.
"Our policy rate may not need to rise as much as it would have otherwise to achieve our goals."
Fed Chairman Jerome Powell
Fed funds futures put the probability of a 25 bps rate hike in June at 25.7%. That’s up from 20.1% last week, and 23.4% a month ago.
Treasury Secretary Janet Yellen told banking sector CEOs last week that additional mergers may be necessary. This suggests that Yellen doesn’t believe the crisis is over.
The Fed reported that commercial bank deposits dropped to $17.1 trillion in the week ended May 10. It was the fourth consecutive weekly outflow. Commercial banks have lost nearly $1 trillion in deposits in just over a year.
Yellen also reiterated to those same bank CEOs that failure to reach a deal on the debt ceiling would be “catastrophic” for the financial system, families, and businesses. The latest round of talks between President Biden and House Majority Leader McCarthy ended on Monday without a deal being struck.
Yellen has indicated that the U.S. could fail to meet debt obligations as soon as June 1. If the U.S. were to default, the repercussions would be far-reaching. “No corner of the global economy will be spared,” said Mark Zandi, chief economist at Moody’s Analytics.
According to Moody’s, if the default were to extend “well into the summer,” the unemployment rate could more than double to 8%. Rates would soar, and the stock market would plunge.
In such an event, gold would likely drop initially as a result of broad-based deleveraging. However, investors looking for a safe haven would eventually step in as buyers.
A rebound above $2009.39 would ease short-term pressure on the downside and return a measure of credence to the underlying uptrend. Such a move would return focus to the recent high at $2066.73 and the all-time high at $2075.28.
Silver
Silver remains defensive as a result of mounting growth risks and lingering uncertainty as to the Fed’s next move.
Silver reached a 7-week low at $23.33 before rebounding somewhat and ending the week with a loss of only 0.55% last week. It was the second consecutive lower weekly close.
ETF outflows totaled 2.02 Moz last week.
A U.S. default would have devastating implications for U.S. consumers, sapping demand for electronics, cars, and solar panels. All are big sources of demand for silver.
On the other hand, a recession and significant job losses would almost assuredly have the Fed contemplating rate cuts later this year. A reversal of the tightening cycle could make any recession relatively short in length and I would expect silver’s longer-term bullish fundamentals to kick back in at that point.
The 100-day SMA is holding on a close basis thus far. Secondary support is noted at $23.02 (50% retracement of the rally from $19.90 to $26.14).
However, a rise back above $24.73 is needed to shift the technical bias back to the upside, putting the recent highs at $26.09/14 back in play.
PGMs
Platinum continues to hold comfortably above the $1000 level. The short-term tone has turned consolidative just below the midpoint of the $1038.68/$1143.25 range.
A stronger dollar and growth risks have put the rally off the February low on pause, but platinum is holding up better than silver and palladium.
Palladium has turned consolidative just above the nearly 4-year low at $1329.18.
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