Risk Appetite and Firmer Yields Weigh on Bullion
The week began with a downturn in the stock market, fueled by concern on several fronts. Investors are keenly aware that September has a long history of being the worst month for U.S. stocks and exercised caution as a result. The Federal Reserve was scheduled to start its two-day meeting on Tuesday, so there was also concern among investors that the Fed may announce a sooner start to tapering.
In addition to tapering bets, inflation was also a top concern. Focus shifted somewhat to deliberation in Congress, as the U.S. moved closer to a government shutdown. As if that weren’t enough to spur on caution, analysts worried that markets could experience a ripple effect stemming from Evergrande troubles.
Evergrande group is a prominent Chinese real estate development company. In fact, Evergrande is the second largest property development firm in China. Despite recently passing the test of its auditors, Evergrande informed banks that they could no longer meet interest payments. The group owned debt comparable to almost 3% of China’s GDP.
For Monday, this meant that U.S. stocks would dive, as caution abounded. The S&P 500 fell by more than 1.6%, marking its wort day since early May. The Dow would also drop, shedding 1.8%, while the Nasdaq dropped by 2.2%. The risk-averse mood was initially a benefit for metals.
Gold gained about 0.6% on Monday, as it neared $1,765 an ounce. Silver was more volatile than gold, which is often the case. Silver would initially dip by 1.4% only to pare most of its losses, ending Monday just below $22.30.
Stocks attempted to rally on Tuesday, but mostly failed. Gold and silver both jumped by more than 1% on Tuesday as the FOMC meeting began. Treasury yields also saw modest gains on Tuesday. The widely anticipated Fed meeting culminated in an address by Fed Chair Jerome Powell. It was here that investors hoped to gain insight on the tapering timeline along with updates on potential rate hikes.
It was revealed that an interest rate increase may occur sooner than expected. However, the Fed announced the benchmark rates would remain unchanged for now. Although no concrete timeline was given, it was said that a tapering of bond buying could begin soon, possibly as early as November.
Notably, the central bank downgraded its economic outlook for the rest of the year. The growth outlook was downgraded, while inflation projections were increased. Among some of the more grim projections, was a predicted rise in GDP of only 5.9% when 7% was forecasted in June.
Gold and silver both saw their weekly highs on Wednesday, with gold reaching $1,786 and silver touching $23.12 an ounce. Stocks gained some momentum on Wednesday, as signs that stimulus was going to stick around for the near term, boosted risk appetite.
Wall Street continued the rebound on Thursday, putting the Dow, S&P and Nasdaq all back into the green for the week. Gold and silver are both seeing pressure by rising yields and stronger dollar as the week draws to an end.
Currently, gold is hovering near $1,746, which would mean a weekly drop of 0.7%. Silver prices dove by 2.2% earlier this morning. Since then, silver bounced, and it is currently near $22.32 an ounce. Despite higher volatility, silver is little changed from the beginning of the week.