The first FOMC meeting of the year ended with another mini-taper of $10 billion; thus, the FOMC’s asset purchase program will purchase $65 billion a month of LTS and MBS. This decision may have had a moderate adverse effect on the prices of precious metals at the end of the month. Nonetheless, the price of gold rallied during January; silver price, however, declined. Looking forward, will gold and silver resume their upward trend in February? Let’s analyze the upcoming events, decisions and reports that may affect gold and silver; let’s start, however, with a short analysis of January.
Gold and Silver Prices January 2014
Gold and silver prices rallied at the beginning of the month only to fall in the last several days of the month – the recent FOMC decision may have contributed to the drop in precious metals prices. Their rally at the first several weeks of January, however, didn’t coincide with the depreciation of the Euro, Aussie dollar and Canadian dollar against the USD. By the end of January, the price of gold rose by 3.12%; the price of silver slipped by 1.6%.
Let’s divide January into two parts: the table below divides the month at January 20th. I divide the month to demonstrate the shift in pace of gold and silver prices; during the first part of January, gold increased by 4.1%; silver, by 4.9%. During the second part of January, however, gold declined by 1%; silver price, by 5.8%.
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During the first part of January, the U.S dollar appreciated against the Euro, Aussie dollar, and Canadian dollar but depreciated against the Japanese yen; the Euro/USD and AUD/USD currency pairs are usually strongly linked with gold and silver – in recent months, however, their relation diminished.
The chart below shows the changes of gold and silver during January, in which the prices are normalized to 100 on December 31st 2013.
(Click to enlarge)
The ratio of gold to silver (gold price/silver price) sharply rose during the month. The ratio increased as silver price has under-performed gold price. During the month the ratio ranged between 61 and 65. The correlation between gold and silver prices weakened during January compared to December. The correlation reached during January 0.86. If the correlation remains robust, it could imply the effect gold has on silver will remain strong.
The correlations among precious metals prices and leading currencies remained weak in recent months. Thus, if major currencies continue to depreciate against the USD, they might have a moderate adverse effect on bullion prices.
The upcoming minutes of the recent FOMC meeting could have some short-term effects on the bullion market; especially if the FOMC minutes reveal little concern by FOMC members regarding the progress of the U.S economy so that the plans to further cut down its QE3 program will remain on track. The recent mini-taper had some adverse effect on precious metals prices. Nonetheless, the recent news on the progress of the U.S economy in employment, GDP, housing and manufacturing was mixed and may have had a short term effect on gold and silver. If the U.S economy mainly labor market slows further down, this could positively affect precious metals. If equity markets continue to fall, this could suggest more investors are pulling into bullion and out of equities. The ongoing decline in GLD’s gold holdings signals the demand for gold as an investment is softening. Finally, if the demand for precious metals in India continues to drop, this could adversely affect the precious metals market. In conclusion, I think gold and silver might continue to slowly pull up.
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