Gold and Silver Forecast for February 3-7

Gold and silver changed direction and fell last week mainly following the latest FOMC’s decision to cut down again its asset purchase program by an additional $10 billion to $65 billion a month. This mini-taper was expected and yet it still dragged down the prices of gold and silver. Moreover, the U.S economy continues to show slow progress: the GDP for the fourth quarter grew by 3.2% – a slower pace than the third quarter, but still a good result. Conversely, jobless clams rose by 19k to reach 348k. For the week of February 3rd to 7th, several reports and events will play out this week including: U.S non-farm payroll report, RBA ECB and BOE rate decisions, U.S ISM manufacturing PMI, and U.S factory orders. 

The price of gold declined by 1.95% last week; moreover, during last week, the average price reached $1,251.72/t. oz which was 0.01% lower than last week’s average. Gold ended the week at $1,239.8 /t. oz.

Silver price also plunged by 3.23%; further, the average weekly rate was $19.40/t oz, which was 2.68% below last week’s price.

Herein is a short overview showing the main decisions, reports and events that will unfold during January 27th to 31st and may affect bullion prices.

Let’s breakdown the main events by leading economies:

U.S

The recent FOMC meeting concluded with the FOMC deciding to taper again QE3 by $10 billion to $65 billion a month.

The table below shows the reaction of gold and silver to the FOMC’s decisions in the past couple of years.

FOMC statment and Gold Silver January 30As seen, the recent FOMC decision may have had an adverse effect on gold and silver. This effect, however, might not last long.

The recent decision didn’t accompany an economic outlook update and press conference. Therefore the minutes of the FOMC meeting, which will be released later this month, could also affect the prices of precious metals.

 

Looking forward, the upcoming reports will include: NF payroll, factory orders, non-manufacturing and manufacturing PMI indexes, and jobless claims. If these reports present slower growth in the U.S economy, they could pull up the prices of gold and silver. Conversely, the recent appreciation of the US dollar against Euro and Canadian dollar may have slightly dragged down precious metals. Thus, if the U.S dollar continues to rally against the Euro and Canadian dollar; this could moderately drag down the prices of gold and silver. The Euro/USD and precious metals had a very weak correlation in recent weeks (during December/January the linear correlation was only 0.22 – mid-weak correlation; the correlation between USD/YEN and gold is -0.38). These correlations suggest that the U.S dollar had little to do with the shifts of precious metals.

Europe

ECB will decide on its cash rate for February. The current rate is set at 0.25% – the lowest level in Euro Area’s history. The inflation in the Euro Area remains very low (below 2%) and the rate of unemployment elevated at 12%. Moreover, the recent developments in Turkey (see below) could suggest that Europe’s problems are far from over. ECB might decide in the near future to take additional steps in its monetary policy. In the meantime, the Euro/USD could play a secondary role in the progress of the prices of precious metals.

Turkey

The recent devaluation of the lira even after the Turkish central bank hiked its interest rate raised the risk of the Turkish economy. This also could explain why in the past several months Turkey has augmented its gold hoards to over 506 tonnes of gold – recently passing the ECB – and the twelfth largest gold holders worldwide. The rise in demand of this country is likely to have little effect on the global gold demand.

India and China

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

In China, the recent manufacturing PMI dropped to a six month low of only 50.5, which means the manufacturing sectors in China are still growing but the slowest pace in recent months. This week is the Chinese New Year so there will be no major reports on China’s economy.

Finally, gold holdings of SPDR gold trust ETF changed course and rose last week by 0.34%. The ETF is still down by nearly 6% in the past couple of months and 1% since the beginning of 2014. Gold holdings were at 793.155 tonnes by the end of last week. If the ETF’s gold holdings continue to rally, this may signal the demand for gold as an investment is improving.

In conclusion…

Despite the rally of gold price at the beginning of the year, gold is only slightly higher than its initial level at the end of last year. Silver is currently down for 2014.  The recent FOMC decision to taper QE3 may have had a modest short term adverse effect on the price of precious metals. Moreover, the ongoing weakness in the U.S equities markets continues to steer investors towards alternative investments such as U.S long term treasuries and precious metals. The upcoming U.S reports such as NF payroll report, factory orders, trade balance, and jobless claims could affect the prices of gold and silver; if they show the U.S economy is slowing down, gold and silver might slightly rally. The rise in volume of trade could reduce the level of volatility of prices. Finally, if the demand for gold and silver as investments continue to improve they could slightly strengthen bullion prices. Therefore, I remain neutral on gold and silver.

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