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Guest Commentary: Gold & Silver Outlook – 04.20.2011

Guest Commentary: Gold & Silver Outlook – 04.20.2011

2011-04-20 15:12:00
Lior Cohen, Energy Analyst for Trading Energy,
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Gold & Silver Outlook – 20 April

Gold and silver kept on rising and they are currently over the 1,500$ mark and 43$ mark respectively.

Let's examine the news and events that might affect gold and silver prices as of April 20th:

Is there a diminishing Australian effect on gold and silver?

As of yesterday April 19th, silver price has risen by 16.38%, while gold price increased by 4.63%.

In the graph below are the daily changes of gold and silver prices during April 2011, in which their prices are normalized to 100=April 1st 2011; the chart shows how silver has outperformed gold:

Guest_Commentary_Gold_Silver_Outlook_04.20.2011_body_Gold_and_silver_prices_April_19__2011.png, Guest Commentary: Gold & Silver Outlook – 04.20.2011

According to Mineral commodity summaries 2010, Australia was among the top countries in producing silver and during 2009 it produced 1,800 tons of silver and had over 31,000 tons of silver reserves – the seventh largest reserve worldwide. In gold, Australia had the second largest gold reserves during 2009 with over 5,800 tons (second only to South Africa).

This might explain the impotence of Australia in the precious metals markets.

During April so far, there has been a moderate positive linear correlation in the daily percent changes of silver and gold prices and AUD/USD, as seen in the chart below. These correlations have diminished in recent months, which might imply that the Australia's effect on gold and silver has declined during April compared to December and January, when the correlations were much stronger.

Guest_Commentary_Gold_Silver_Outlook_04.20.2011_body_Correlation_Gold__Silver_Prices_and_USD_AUD_currency_Dec_2010-_April_2011.png, Guest Commentary: Gold & Silver Outlook – 04.20.2011

As of Tuesday, April 19th the ratio between gold and silver prices kept on falling and reached a new low of 34.05.

Guest_Commentary_Gold_Silver_Outlook_04.20.2011_body_Gold_and_Silver_prices_ratio_2011_April_20.png, Guest Commentary: Gold & Silver Outlook – 04.20.2011

The ratio could be interpreted as one troy ounce (31.1 gram) of gold is worth 34.05 troy ounces of silver.

The Chinese effect – a hypothesis

China, the world's second largest gold consumer, also has a unique condition that might have some additional effects on gold and silver prices.

In order to slow down the rising inflation in China that reached by March 5.4% (Y2Y), Bank of China raised last month its basic interest rate to 6.31% an increase of 25 basis points.

China has pegged its currency to the USD at roughly 6.5.

In order to keep the exchange rate at its level China needed to purchase more USD because of China's interest rate raise that could have appreciated China's currency. Since there are many limitations on the Yuan, it makes it easier for the People Bank of China to control its currency.

These purchases of US currency might have affected not only the strength of US dollar against other currencies, but also driven the prices of commodities including gold and silver up as they are priced in US dollar.

Therefore, if China will continue to fight its inflation by raising its interest rate, it might further increase the prices of gold and silver.

Update from Middle East

NATO claims there is a limit to its ability to stop Qaddafi's forces.

In the mean time to help the rebels finance their fight, the Italian government, one of the prime importers of Libyan oil has helped the rebels to sell oil and comply with the existing treaties with Italy.

See here for a more detailed update on Middle East and its effect on commodities' markets.

Gold and silver Outlook and Analysis:

I think we will probably continue to see rises in gold prices, as the ongoing upward trend will continue for the reasons listed above; for silver prices this upward trend will continue even more so.

Here is a reminder of the top events and reports that are planed for today and tomorrow (all times GMT):

Today

9.30 Bank of England MPC meeting

15.30 – EIA report about Crude oil inventories

Tomorrow

13.30 – Department of Labor report – US unemployment claims

15.30 – EIA report about Natural gas storage

By: Lior Cohen, Energy Analyst for Trading Energy

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