Gold and silver bounced back mainly by the end of the week following the lower than expected rise in new jobs. According to the latest NF payroll report, only 74k jobs were added in December, which was lower than anticipated. But the rate of unemployment slipped to 6.7% – its lowest level in years. Further, initial claims fell by 15k to reach 330k. Besides the employment report, the minutes of the FOMC meeting was released and rekindled the conversation about future tapering of QE3. Despite the release, it didn’t seem to have much of an effect on the prices of precious metals and at best only slightly pressured down gold and silver. For the week of January 13th o 17th, several reports and speeches will take place this week including: Bernanke’s speech, U.S housing starts, EU industrial production, U.S CPI and PPI, U.S federal budget, China new loans, Philly fed index, and U.S. jobless claims.
The price of gold rose by 0.67% last week; the average price reached $1,233.88/t. oz which was 1.6% higher than last week’s average. Gold ended the week at $1,246.9 /t. oz.
Silver price inched up by 0.05%; the average weekly rate was $19.86/t oz, which was 0.47% below last week’s.
Herein is a short overview showing the main decisions, reports and events that will unfold during January 13th to 17th and may affect bullion prices.
Let’s breakdown the main events by leading economies:
Last week’s release of the minutes of the last FOMC meeting didn’t stir up the markets. The minutes revealed the concerns of FOMC members about the progress of the U.S economy in the labor market and the ongoing low inflation. The minutes of the meeting reignited the debate of the next tapering announcement. Some members didn’t want the reduction in the asset purchase program because it could be interpreted as tightening of the financial conditions:
“Some also expressed concern about the potential for an unintended tightening of financial conditions if a reduction in the pace of asset purchases was misinterpreted as signaling that the Committee was likely to withdraw policy accommodation more quickly than had been anticipated. “
Moreover, Members still think the tapering of QE3 should be taken very cautiously:
“As a consequence, many members judged that the Committee should proceed cautiously in taking its first action to reduce the pace of asset purchases and should indicate that further reductions would be undertaken in measured steps.”
Finally, FOMC members stated that the economic conditions will continue to affect their decision of future tapering:
“If incoming information broadly supports the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases”
Therefore, the recent NF payroll report showed little growth as only 74k jobs were added. The recent drop in the rate of unemployment to 6.7% is partly due the decline in the participation rate. Also, the low employment to population ratio for 25 to 54 year old workers, the high duration of unemployment, and the rise in partial employment suggest the labor market isn’t progressing as well as the low unemployment rate might suggest. Some FOMC members also think the labor market isn’t doing much better:
“A few participants noted the risk that the persistent weakness in labor force participation and low rates of productivity growth might indicate lasting structural economic damage from the financial crisis and ensuing recession.”
Bernanke’s speech this week could provide some input behind the recent FOMC decision. The upcoming U.S reports that will come out next week could also offer some insight regarding the progress of the U.S economy. These reports include: Housing starts, building permits, CPI, PPI, industrial production, UoM consumer sentiment, Philly Fed index, and jobless claims. If these reports show little progress in the U.S economy, they could keep pulling up the prices of gold and silver.
The Euro bounced back last week against the USD mainly at the end of the week. Moreover, other currencies such as Aussie dollar and Japanese yen also slightly appreciated against the USD. Nonetheless, the strengthening of the Euro may have had little effect on gold and silver prices as their linear correlation remained very weak. The linear correlation between Euro/USD and gold price was very weak during December/January at -0.12. Next week, several reports will be released including: German CPI, and EU industrial production. These news items could affect the Euro/ USD, and, in turn, may moderately affect the direction of gold and silver.
India and China
During last week, the Indian Rupee sharply appreciated against the USD. If this trend continues, it could positively affect the demand for gold and silver in India.
China is still leading the charge in the demand for gold and silver. The progress of this economy could indirectly indicate the progress of the growth in demand for precious metals. The recent economic data didn’t show much growth in China’s economy. China’s manufacturing isn’t growing faster as its PMI slipped in its recent update. The upcoming financial reports on China’s economy such as new loans could offer some additional input about the progress of this country.
Finally, gold holdings of SPDR gold trust ETF slipped again in the past week. The ETF was down by nearly 6% in the past couple of months and 1% since the beginning of the year. Gold holdings were at 793.12 tons by the end of last week. If the ETF’s gold holdings continue to dwindle, this may signal the demand for gold as an investment continues to diminish.
In conclusion, this week gold and silver might keep their unclear trend: Last month’s reaction to the FOMC meeting decision might have been a bit harsh and the minutes of the FOMC could rectify this reaction if it shows more dovish sentiment from the FOMC members and the new Chairman. The upcoming U.S reports could drag down the prices of gold and silver if they show the U.S economy continues to improve. The potential rise in volume of trade could reduce the level of volatility of prices. Finally, the ongoing drop in demand for gold and silver as investments is likely to pressure down precious metals prices. Therefore, I remain neutral on gold and silver.
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