A Dovish Fed Is Bullish for Gold and Silver

Last week, I forecast that we would get a surprisingly low Non-Farm Payrolls, and that is exactly what happened. I also forecast a jump in jobless claims, and today we got that too. Why does this matter? I’ll let Powell explain. Following the March FOMC meeting, he said:

“If there were a significant weakening in the data, particularly in the labor market, that could also be a reason for us to begin the process of reducing rates.”

He also stated: “And when I say something, I use the term ‘unexpected’ weakening of the labor market…we’re talking about something that’s unexpected.”

And finally, the cherry on top! 

“If we see unexpected weakness in the labor market, that could draw a policy response.”

Hey, presto!

Since then, the interest rate futures market has started pricing in rate cuts again.

Prior to the recent FOMC meeting, the probability of a rate cut in September was 45%, now it’s 67%. The probability of a rate cut in November was 57%, now it’s 79%. For December, the probability that rates will be cut by 50 basis points to 5.00% were 69%, now it’s 90%.

So, for all Powell’s insistence on getting to 2% inflation being the primary goal, the deterioration in the labor market is undermining that resolve, and that is being reflected in the futures markets. 

A big correction in the stock market, which I consider inevitable, would be the catalyst for lower rates and ultimately a return to QE. The same goes for a new and more significant banking crisis. All of which would only be gasoline on the fire for Gold and Silver.

In the meantime…

GOLD BARS AND COINS

The risk of one more drop to ~$2250 remains, but Gold has broken out of its bull flag, and my target on the upside is $2500 before the next big reversal. So, whether we go back down to $2250 and then go up, or we go straight up, the risk-reward is skewed to the upside. Even more so medium term and long term given the fundamental backdrop already mentioned.

SILVER BARS AND COINS

The same goes for Silver. It has broken out of its downtrend. The problem is that there was no back-test following the breakout. This could mean a drop back to $26. At the very least, we are due a reversal to ~$27 if we have completed 5 waves up from the low of $26.25, which can be seen on the chart above. With that said, I’m expecting a move up to $30-$32 before the next big reversal.

In conclusion, we are still working through the back and forth in the short term, but the overall trend remains up. Longer term, I am still looking for $3000 in Gold and $50 in Silver, and that’s being conservative, imho.