Gold price continued to slowly recover during last week, while silver changed course and fell. The weakness in the equities markets and the depreciation of the US dollar against the Euro and Japanese yen may have contributed to the rally of the yellow metal. During last week several reports were released: U.S jobless clams inched up by 1k to reach 326k; American existing home sales slightly disappointed and rose by only 1% during December to reach 4.87 million home sales. These reports, however, didn’t seem to affect much the financial markets. For the week of January 27th to 31st, several reports and events will take place this week including: FOMC meeting, Euro group summit, U.S new and pending home sales, U.S GDP for the fourth quarter, China’s manufacturing PMI, EU monetary development, U.S consumer confidence, and U.S. jobless claims.
The price of gold increased by 1% last week; further, the average price reached $1,251.82/t. oz which was 0.52% higher than last week’s average rate. Gold ended the week at $1,264.5 /t. oz.
Conversely, silver price decreased by 2.64%; further, the average weekly rate was $19.94/t oz, which was 1.35% below last week’s rate.
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:
The upcoming FOMC could affect in the short term the prices of gold and silver. Last month, the FOMC’s decision to taper QE3 by $10 billion resulted in a sharp drop in precious metals prices.
The table below shows the reaction of gold and silver to the FOMC’s decisions in the past several years.
The upcoming decision won’t accompany an economic outlook update and press conference, which could result in a smaller effect on the financial markets. If the FOMC decides to taper by additional $10 billion it could have some modest adverse effect on gold and silver for the short term. If the FOMC tapers by a larger margin, it could have a stronger negative effect on precious metals, but again for a short term. If the FOMC doesn’t change its policy, this could result in a moderate positive effect on bullion prices.
Besides the FOMC’s meeting, the recent drop in the U.S equities markets may have also contributed to the rally of alternative investments such as gold.
The upcoming reports will include: GDP for the fourth quarter, core durable goods, jobless claims, new and pending home sales, and consumer confidence. If these reports present progress in the U.S economy, they could drag down the prices of gold and silver. Moreover, the recent appreciation of the US dollar against Aussie dollar and Canadian dollar may have slightly pulled down precious metals. Conversely, if the U.S dollar continues to fall against the Euro and Japanese yen; this could moderately pull up 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 0.11 – 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 development of precious metals. As such, this could suggest the progress of the U.S dollar will have little effect on gold and silver prices.
India and China
During last week, the Indian Rupee sharply depreciated against the US dollar. If this trend continues, it could adversely affect the demand for gold and silver in India.
The demand of gold and silver China, the leading country in importing precious metals, is likely to play a secondary role in affecting the bullion prices. The development in China’s economy could indirectly indicate the potential progress in its demand for precious metals. The upcoming financial releases on China’s economy including manufacturing PMI could offer some insight regarding the progress of this country.
Finally, gold holdings of SPDR gold trust ETF changed course and fell in the past week. The ETF was down by nearly 6.3% in the past couple of months and 1.34% since the beginning of 2014. Gold holdings were at 790.456 tons by the end of last week. If the ETF’s gold holdings continue to fall, this may signal the demand for gold as an investment is further falling.
The recent rise in precious metals prices may result in some sell-offs. But if the U.S equities markets continue to fall, this could steer investors towards alternative investments such as bullion. The FOMC’s meeting might modestly stir up the bullion markets if the FOMC were to change its monetary policy; currently, analysts expect that the FOMC will taper again QE3 by additional $10 billion. The upcoming U.S reports such as core durable goods, GDP for fourth quarter, and home sales could affect the prices of gold and silver; if they show the U.S economy continues to improve, gold and silver might slightly decline. 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 decline they could slightly weaken bullion prices. Therefore, I think gold and silver could continue to rally.
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