Following the sharp gains for gold and silver prices during January when gold price rose by 11% and silver by 19.15%, the situation in February was much different. Gold price increased by only 2.07% from the end of January; silver has added 6.49% to its value. What were the events and decisions that may have affected the direction of gold and silver prices during February? Part of it might have to do with the recent decision of the EU leaders to approve the bailout package for Greece. Will gold and silver prices reignite their rally from January and trade up during March 2012? Let’s analyze the precious metals market for February and provide a short outlook for gold and silver prices for March 2012.
Gold and Silver Prices February 2012
Gold and silver prices started February with little changes; this no-trend, however soon turned into sharp gains.
Gold ended February (as of February 26th) with a 2.07% gain and silver rose by 6.49%.
Let’s divide February into two parts: the table below divides the month to two with the breaking point at February 17th; during the first part of February, gold declined by 0.8% and silver price rose by only 0.1%. During the second part of February, silver rose by 6.4% and gold price by 2.9%.
During the first part of February, the U.S dollar slightly depreciated against the Euro, Canadian dollar and Australian dollar; the last two currencies are usually strongly correlated with gold and silver prices; during the second part of February, the U.S dollar sharply depreciated mainly against the Euro; this shift might partly explain the sharp increase of gold and silver prices during the second part of the month.
The chart below shows the developments of gold and silver prices during February, in which the prices are normalized to 100 on January 31st 2012.
The next chart presents the shifts in the ratio of gold to silver (gold price/silver price) during February; the ratio didn’t change much during the month until the last few days of the month when the ratio plummeted. The ratio decreased as silver price has outperformed gold price. In the last week of February the ratio declined to nearly the 50 mark – lowest mark since October 2011.
Here are several factors that may have contributed to gold and silver to trade up during February:
- The decision of EU ministers of finance to approve the next bailout package to Greece (see below for more on this subject);
- Following said decision, the Euro sharply appreciated against the U.S. dollar mainly during the penultimate week of February;
- The ongoing FOMC pledge to keep rates low until late 2014;
- The U.S. federal deficit grew by 27 billion during January 2012; this expansion slightly raised the uncertainty level in the market;
- The rise in U.S long term securities yields during most of the month;
Outlook for Gold and Silver Prices – March
Here are several factors to consider that may affect the direction of gold and silver:
The ECB will decide during the second week of March its rate; in February the ECB President left the interest rate unchanged at 1.00%. If the ECB will lower the rate, this may curb the recent rally of gold and silver prices.
The European debt crisis has had a negative effect on the Euro and this in turn may negatively affect gold and silver prices. If the G20 will issue another rescue fund, it could lower the anxiety in the markets and thus trade up commodities prices.
The upcoming testimony of Bernanke on March 1st and even more importantly the FOMC meeting which is set to March 13th could shake up the precious metals market. If there will be another announcement of monetary easing such as QE3, it could promptly and positively affect gold and silver. But I speculate there won’t be a big announcement of QE3.
The Federal Reserve’s pledge of keeping rates low until late 2014 will keep gold and silver prices high; once this pledge will be over (perhaps even if the Fed will break its promise and raise rates earlier than 2014) it could start adversely affecting gold and silver prices.
In conclusion, I speculate gold and silver will continue to trade up at a similar slow pace during March as they did during most of February; there might be large gains to gold and silver if the Federal Reserve will hint of another QE plan (but I doubt that). On the other hand, as the month will progress, I also speculate gold and silver might trade down if the concerns regarding the European debt crisis will reignite. If the U.S. will continue to show signs of recovery it could also negatively affect the direction of precious metals prices. Finally, if the major “risk currencies” will rise as they did during February (mainly the Euro) this could also pressure up precious metals prices.
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