Categories: General Market Commentary / Precious Metals
Topics: General Market Commentary / General Precious Metals

Sprott's Trey Reik Precious Metals Watch

Precious metals resumed their upward climb during the first two months of 2017. During January and February, spot gold rose 8.34% (from $1,152.27 to $1,248.33) and spot silver increased 15.08% (from $15.92 to $18.32). During early March, however, precious metals suddenly reversed course, with spot gold declining 2.30% and spot silver declining 5.29% through respective March 15 closes of $1,219.68 and $17.35. Without question, the greatest variable affecting precious-metal performance during recent weeks has been market handicapping of the Fed’s March 15 FOMC meeting. On 2/22/17, Bloomberg consensus expectations for a rate hike at the March meeting measured 34%. Ten trading days later (3/8/17), this percentage had swelled to 100%.

We attribute this swift shift largely to a short stretch of particularly impassioned Fed jawboning, book-ended by the FOMC’s two crucial thought-leaders, Vice Chairman William Dudley and Chair Janet Yellen. On 2/28/17, Mr. Dudley commented, “I think the case for monetary policy tightening has become a lot more compelling,” but then raised eyebrows with uncharacteristic frankness about U.S. asset prices: “There’s no question that animal spirits have been unleashed a bit, post the election. The stock market is up a lot.” By 3/3/17, Chair Yellen sealed the deal for a 3/15 hike in a speech to the Executives’ Club of Chicago, in which she remarked, “Indeed, at our meeting later this month…a further adjustment of the federal funds rate would likely be appropriate.” As avid students of Fed communication, we find the Fed’s tone change since 2/28/17 nothing less than abrupt. What factors account for this sudden shift to urgency following years of trademark caution? Might the Fed be reacting to strengthening economic data?

While “soft” economic data and sentiment measures have broadly improved since Trump’s election, “hard” economic statistics (historically favored by the Fed) have remained stubbornly weak. During the recent period of hawkish Fed rhetoric (2/28/17-3/3/17), soft data continued to surprise to the upside: the Chicago PMI registered 57.4 versus estimates for 53.5 (2/28); Conference Board consumer confidence came in at 114.8 versus estimates for 111.0 (2/28); and ISM indices for manufacturing (3/1) and services (3/3) totaled 57.7 and 57.6 respectively (versus estimates for 56.2 and 56.5). Hard data released during the same period, however, continued to disappoint: Q4 GDP (2/28) was adjusted downward to 1.9% versus estimates for 2.1%; wholesale inventories (2/28) fell 0.1% versus estimates for an increase of 0.4% (pressures Q1 GDP); the U.S. trade deficit (2/28) surged to the second worst reading since 2008 (expanding to $69.2 billion versus estimates for $66.0 billion); and construction spending (3/1) declined 1.0% versus estimates for a gain of 0.6%. On 3/15, the Atlanta Fed’s GDPNow forecast for Q1 2017 collapsed all the way to 0.9%, after registering 2.5% as recently as 2/27 and 3.4% on 2/1. As shown in Figure 1, the spread between hard and soft economic data surprises has now expanded to a 17-year high (Bloomberg). Something has to give, and history overwhelmingly suggests soft data and sentiment measures are likely to recede dramatically in coming weeks. The Fed is well aware of these probabilities, yet still felt heightened urgency for a March hike.

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