March 3, 2013

Gold and silver prices resumed their downward trend during February. Their performance in the second month of the year was the worst since May 2012 – back then gold fell by 6% and silver by 10.5%. Moreover, during last month, the amount of gold holdings of the gold ETF SPDR also recorded its sharpest fall in years of over 5% compared to January. This raises the question, is the big bull market of gold over? The decision of the FOMC  to keep its current $85 billion a month purchase program or the testimony of the Bernanke in the House of the Representatives to maintain this program for the near future didnt seem to impress bullion investors. The U.S money base and the demand for long term securities continue to grow, partly due to the FOMCs current monetary policy. These factors, however, dont seem to coincide or affect the direction of gold and silver prices. Will gold and silver continue to trade down in March? Lets analyze the precious metals market for February and provide a short outlook for gold and silver for March.

Gold and Silver Prices February 2013

Gold and silver rates declined during last month. Most of the fall in prices came during the second half of the month. The whole debate over the spending cuts in the U.S (sequester) that eventually took into effect on March 1 st didnt seem to influence bullion or forex traders.  Following the modest fall in gold and silver at the beginning of the month, by the end of February, gold declined by 5%; silver, by 9.4%. Due to these numbers, February was the worst performing month for gold and silver since May 2012. Furthermore, gold price fell in the past five months; silver price, in the past three out of the five months.

Lets divide February into two: the table below divides the month at February 12 th ; I divide the month to demonstrate the change in pace of both gold and silver; during the first part of February, gold slightly declined by 0.7%; silver, by 1%. During the second part of February, silver tumbled down by 8.5%; gold price, by 4.3%.

During the first part of February, the U.S dollar appreciated against the Euro, Aussie Japanese yen, and Canadian dollar; the USD/CAD and AUD/USD currency pairs are usually strongly linked with gold and silver prices. Moreover, during the second part of the month, the CAD and EURO tumbled down against the USD. The appreciated of the USD may have partly pulled down gold and silver.

The chart below shows the changes of gold and silver prices during February, in which the prices are normalized to 100 on January 31 st 2013.

The next chart shows the movements in the ratio of gold to silver (gold price/silver price) during last month; the ratio had an upward trend. The ratio rose as silver price has under-performed gold price. During February the ratio ranged between 55 and 52.5.

Here are several factors that may have pressured down of gold and silver prices during the month:

1. Several U.S reports were positive and showed progress for the economy: the manufacturing PMI increased to 54.2%; new home sales (opens pdf) hiked by 15.6%; the forth quarter GDP was revised up to 0.1%. These reports may have pulled down bullion prices;
2. The ongoing deprecation of the Indian Rupee may have dragged down the demand for gold in India, among the leading importers of gold;
3. The recent minutes of the FOMC may have contributed to the speculations around the future plans of the Fed as to when will it conclude QE3;
4. The drop in the U.S jobless claims during most of February;
5. The depreciation of several other currencies including Euro, Canadian dollar and Aussie dollar during February;
6. China, among the leading countries in importing gold, showed signs of growth;

Here are several factors that may have pulled up gold and silver during the month:

1. The recent U.S non-farm payroll report was well above 120k but it didnt meet the higher expectation; the unemployment rate remained virtually unchanged; this report tend to be negatively correlated with gold and silver prices;
2. The sharp gain in the U.S money base during 2013 (see below for more).
3. Several U.S reports were negative: the housing starts fell in January; contracted by 0.1%, the Philly fed index also declined. These reports may have pulled down the USD;
4. Bernanke remained dovish about the FOMC monetary policy; this includes maintaining its QE3 program without given to much away regarding the exit date of this program;
5. The pledge of the FOMC to maintain low rates until mid 2015.

The rise in the U.S money base, most like due to QE3, didnt seem to pull up gold and silver prices up to now. If the U.S money base wont be able to pull up gold and silver, then the odds of their recovery fall down. The upcoming FOMC meeting might affect bullion rates: if the FOMC members will make a big and unexpected announcement such as putting a time limit on QE3; in such a case, this could pull bullion rates down. In the U.S, if the economy will continue to show signs of slow progress in the labor, housing and manufacturing sectors, this could pull down bullion rates – as the demand for a safe haven investment dwindles. If other commodities such as oil will continue to fall this month, then they could pull up gold and silver. The recent drop in the GLD ETF amount of gold held might suggest the demand for gold as an investment has recently fell. If the market sentiment will remain bearish, then bullion rates might not rally during March. The depreciation of the Indian Rupee might pull down the prices of gold via the decline in demand in this country. Finally, if major currencies including Euro and Aussie dollar will continue to depreciate against the USD, then this could also pull down gold and silver prices. In conclusion, I guess gold and silver will continue to slowly decline during March.

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