Guest Commentary: Gold and Silver Outlook for January 2012
Gold and silver changed direction and sharply fell during most of December. Gold ended the month 10.5% below its initial level, and silver declined by 14.9%. What were the main factors that may have caused the sharp drop in gold and silver prices during December? Part of it might have to do with the disappointment of many investors at the FOMC for not issuing a stimulus plan (QE3); additional factors may include the ongoing uncertainty in the EU regarding the European debt crisis and signs of the U.S economy's slow recovery. So what is next for gold and silver prices in January 2012? Let's examine the metals market for December and provide a quick outlook for gold and silver for January.
Gold and Silver December 2011
Gold and silver started the month of December with moderate changes that very quickly turned into sharp falls.
Gold ended December with a 10.5% decrease and silver declined by 14.9%.
Let's divide December into two parts as in the table below with the breaking point at December 15th; during the first part of December, gold price fell by 9.9% and silver by 10.8%. But during the second part of December, silver declined by only 4.6%, and gold by 0.7%.
During the first part of December, the USD sharply appreciated against the Euro, AUD and CAD, in which the first two currencies are usually strongly correlated with gold and silver; during the second part of December, the USD only moderately appreciated against the Euro and depreciated against the AUD and CAD; this shift might partly explain the sharper fall of gold and silver during the first part of the month.
The chart below presents the changes in gold and silver during December, in which the prices were normalized to 100 on November 30th 2011.
The next chart shows the development of the ratio of gold to silver during December; the ratio had an upward trend during most of the month. The ratio rose as silver underperformed gold. In the last week of December the ratio stabilized around the 56-57 mark.
Here are several factors that may have pushed gold and silver down during December:
- The disappointment of traders at the FOMC for not issuing a stimulus plan (QE3);
- The European debt crisis continues to affect traders and raise the anxiety level in the markets. This may have affected precious metals to trade down via the strengthening of the US dollar;
- The U.S labor report that was published in December showed an increase in U.S. employment and this report is usually negatively correlated with gold and silver prices (see below);
- The decline in long term U.S Treasury bills yields mainly during the first half of the month (see below);
- The strengthening of USD compared with the riskier currencies such as Euro, mainly during the first half of December;
By: Lior Cohen, Energy Analyst for Trading NRG
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