The precious metals market is experiencing a confident rise. Gold and silver are gaining value amid a weakening US dollar, which is stuck at a two-week low. Investors are reassessing their expectations for the Federal Reserve's (Fed) interest rate, and this plays into the hands of "non-yielding" assets.
At the time of analysis, gold rose by 0.35% to $4,170, and silver added 0.23% to $63. Both metals continue to recover after the release of weak labor market data for June. It was this report that served as a catalyst, shifting market sentiment regarding monetary policy.
Why are Fed rates so important for metals?
Gold and silver do not generate direct income in the form of coupons or dividends. Their attractiveness directly depends on the opportunity cost of money. When the market expects high rates, holding metals becomes less profitable. But as soon as rate forecasts soften, precious metals receive a powerful boost for growth.
This is exactly what happened after the release of June employment data. The US economy created only 57,000 jobs — almost half the expected 113,000. Additionally, estimates for April and May were revised downward by 74,000. The unemployment rate fell to 4.2%, but the overall picture turned out weaker than forecasts.
The currency market reacted immediately. The US Dollar Index (DXY) remained at two-week lows, holding below 101 points after its sharpest weekly drop since April.
Rate revision: what do the numbers show?
According to data from the CME FedWatch tool, the probability of a rate hike in July decreased to 21.9% from 29.9% a week earlier. The probability of holding the rate rose to 78.1%. September statistics also show a softening of expectations: the combined probability of at least one hike fell to 53% from 59.4%, and the probability of two hikes dropped from 12.6% to 8.7%.
Meanwhile, Fed Governor Kevin Warsh stated at the European Central Bank forum in Sintra that inflation risks have diminished, reaffirming a commitment to price stability. This only strengthened the "dovish" sentiment.
Traders have already shifted their focus to new data. This week, the minutes of the Fed meeting will be published, and on July 14, fresh inflation statistics will be released — much now depends on this report.
My analysis: The market is clearly pricing in a softer scenario from the Fed. If inflation reports confirm a slowdown, we could see further dollar weakness and a new rally in gold and silver. However, it is worth remembering that markets tend to overestimate "dovish" signals — any unexpectedly strong inflation report could quickly reverse the trend.