Gold & Silver Year End Outlook

Gold prices have experienced moderate to strong daily fluctuations as recent economic reports paint a mixed picture of the U.S. economy. Market participants remain focused on the Federal Reserve's potential trajectory regarding both the magnitude and timing of interest rate cuts this year.

In the current economic climate negative economic news tends to boost gold prices. This is because market sentiment driving gold pricing higher is based on the perceived direction of the Federal Reserve's monetary policy regarding rate cuts. Disappointing economic data is seen as evidence that the Fed's fight against inflation is working, potentially leading to earlier rate cuts and thus higher gold prices.

Yesterday investors reacted to a Commerce Department report revealing contraction in the U.S. housing sector. Housing starts for privately owned units fell 5.5% from April, reaching a seasonally adjusted annual rate of 1.277 million units in May. This figure missed the consensus forecast of 1.390 million units by 8.1% and represented a 19.3% year-over-year decline. Single-family starts, which account for the majority of the housing market, also decreased by 5.2% in May to 982,000 units.

This disappointing housing data largely contributed to significant gains in gold, with the most active August futures contract rising $29 to reach $2,373 per troy ounce.

However, today strong PMI moved gold prices dramatically lower. The release of a strong S&P Global U.S. Composite Purchasing Managers Index (PMI) strengthened the dollar and was a major factor in gold's daily decline of $38.90. This PMI report eroded the existing gains in gold pricing for the week, resulting in a $17 weekly decline.

According to the CME's FedWatch tool, there is now an 89.7% probability that the Federal Reserve will maintain its current benchmark interest rate between 5.25% and 5.50% at next month's FOMC meeting. This represents an increase from yesterday's 87.6% probability and a significant jump from the 74.6% probability one month ago.

The probability of a rate cut at the September FOMC meeting is much higher. There's only a 33.2% chance that the Fed funds rate will remain unchanged. By the December FOMC meeting, it's almost certain (94.9% probability) that the Fed will have cut rates with the highest probability (44.3%) suggesting that Fed funds rates will be 0.50% lower.

Wishing you as always good trading,