Gold and Silver Forecast for February 17-21

Gold and silver continued to rally last week following the ongoing slowdown in the U.S: retail sales declined by 0.4% during January; industrial production declined by 0.3% in January. Finally, jobless clams rose by 8k to reach 339k. Janet Yellen, the Chair of the FOMC, testified in the House of Representatives and Senate. She pointed out that if the U.S economy slows down, it could lead the FOMC to implement additional monetary measures, but for now it seems that the FOMC will keep slowly reducing its asset purchase program. In the forex market, the Euro, Aussie dollar and Japanese yen rallied against the USD. This may have also helped pull up precious metals.  For the week of February 17th to 21st, several reports and events will come to fruition this week such as: Minutes of FOMC meeting, U.S PPI, China’s new loans, U.S existing home sales, minutes of last RBA meeting, ECOFIN Summit, U.S housing starts, China, and EU’s manufacturing PMI reports, Canada’s retail sales, and U.S CPI.

The price of gold rose by 4.4% last week; moreover, the average price reached $1,295.76/t. oz which was 3.02% higher than last week’s average rate. Gold ended the week at $1,318.8 /t. oz.

The price of silver also increased by 7.45%; further, the average weekly rate was $20.48/t oz, which was 4% above last week’s rate.

Herein is a short overview showing the main decisions, reports and events that will unfold during February 17th to 21st and may affect precious metals prices.

Let’s breakdown the main events by leading economies:

U.S

In her first testimony at the House as Chair of the FOMC, Janet Yellen addressed the issues the U.S economy faces, the FOMC’s current outlook and the measures the FOMC may take in the future – i.e. the FOMC’s monetary policy. The recent slowdown in the labor market is a concern and there is risk in the U.S economy falling to another slowdown. But the slow decline in unemployment is likely to keep the FOMC’s policy on track so that the Fed will continue to taper QE3 in the coming months. The minutes of the FOMC might shed some additional light on FOMC member’s concerns regarding the progress of the U.S economy.  Keep in mind that the current inflation is very low – below the FOMC’s target – and the labor market isn’t recovering so fast. These factors could eventually lead the FOMC to consider other measures to positively affect the markets such as increasing the target inflation or pegging the long term interest rates at low level – say 2.5% for 10 bonds. But it’s too early to speculate…

This week, besides the minutes of the FOMC, several reports will come out including: Philly Fed index, CPI, PPI, TIC Long Term Purchases, housing data and jobless claims. If these reports show slower growth in the U.S economy, they could positively affect the prices of bullion. Further, the ongoing depreciation of the US dollar against Euro, yen and Aussie dollar may have also helped rally precious metals. Thus, if the U.S dollar continues to weaken against the Euro yen and Aussie dollar; this could moderately pull up the prices of gold and silver. The correlation between Euro/USD and precious metals had strengthened in recent weeks (during January/February the linear correlation was 0.53 strong correlation; the correlation between USD/YEN and gold is -0.57). These correlations suggest that the fall of the U.S dollar had an effect on precious metals prices.

Europe

This week, the EU manufacturing PMI (flash report), German ZEW economic sentiment, and EU Economic Forecast will be released. The EU Summits will also take place this week. These reports and events could affect the Euro/USD, which could play a secondary role in the progress of the prices of precious metals.

India and China

During last week, the Indian Rupee slightly appreciated again against the US dollar. If this trend persists, it could positively affect the demand for precious metals in India.

In China, the manufacturing PMI (flash) and new loans reports will be released. If the Chinese economy continues to slow down, this might imply the demand for commodities in this country is diminishing, which could also curb the recent recovery of precious metals.

Finally, during last week, gold holdings of SPDR gold trust ETF rose again for the third week in a row by 0.53%. The ETF is still down by nearly 5% in the past couple of months but is at the same level as it was at the beginning of 2014. Gold holdings were at 801.251 tonnes by the end of last week. If the ETF’s gold holdings continue to increase, this may signal the demand for gold as an investment is improving.

In conclusion…

The potential slowdown in the U.S could play in favor of the rally of precious metals prices. The upcoming U.S related reports could offer some additional inflation regarding the progress of the economy. The upcoming minutes of the FOMC meeting could shed some light on the FOMC’s future steps and I suspect it could raise the idea that the FOMC is ready to keep tapering QE3. This message could drag down the prices of gold and silver. The drop in the US dollar against leading currencies could have also helped pull up precious metals prices. But if this trend changes direction, it could also cut down the prices of precious metals. The recent rally in the U.S equities markets could also curb down the recovery of precious metals. Finally, if the demand for gold and silver as investments continue to rise, they could pull up gold and silver prices. Nonetheless, I suspect gold and silver may change course and slightly decline as a correction to last week’s sharp rise.

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