Following the previous FOMC meeting, which ended with a mini-taper, the FOMC will convene again for the second time this month. This upcoming meeting could stir up the markets as it did in the previous meetings. Despite the tapering of QE3 to $65 billion a month of LTS and MBS, the gold and silver market continued to recover in the past couple of months. Looking forward, will gold and silver continue to rise? Let’s examine the upcoming events, decisions and reports that may affect gold and silver; let’s start, however, with a short analysis of February.
Gold and Silver Prices February 2014
Gold and silver prices jumped during the month mainly during first couple of weeks of March. Their rally at the first several weeks of February coincided with the appreciation of the Euro, Aussie dollar and Canadian dollar against the USD. By the end of February, the price of gold rose by 6.6%; the price of silver, by 11.08%.
Let’s split February into two parts: the table below divides the month at February 18th. I divide the month to demonstrate the change in pace of gold and silver prices; during the first part of February, gold spiked by 6.8%; silver, by 14.6%. During the second part of February, however, gold inched down by 0.2%; silver price, by 3.1%.
(Click to enlarge)
During the first part of February, the U.S dollar depreciated against the Euro, Aussie dollar, and Canadian dollar but slightly appreciated against the Japanese yen; the Euro/USD and AUD/USD currency pairs are usually strongly correlated with gold and silver.
The chart below presents the changes of gold and silver during February, in which the prices are normalized to 100 on January 31st 2014.
(Click to enlarge)
The ratio of gold to silver (gold price/silver price) sharply fell during the month. The ratio decreased as silver price has out-performed gold price. During the month the ratio ranged between 65 and 60.
The correlation between gold and silver prices weakened during February compared to previous months. The correlation reached during February 0.725 – the lowest level since March 2013. If the correlation continues to weaken, it could imply the effect gold has on silver will diminish.
The standard deviations of gold and silver prices didn’t change much during February compared with their standard deviations in January. This means, the volatility of gold and silver prices remained nearly unchanged in February.
FOMC Meeting – Update
In the previous FOMC meeting the FOMC decided to slash again its $75 billion a month asset purchase program by $10 billion to $65 billion a month. That decision wasn’t too surprising and only had a negative effect on the prices of bullion for a short time. Since QE3 had little positive effect on gold and silver during last year, it might imply, but not necessarily, that tapering QE3 will have little long term adverse effect on gold and silver (more on that in subsequent chapters). The Chair of the FOMC, Janet Yellen, suggested in her recent testimony that the FOMC won’t change its current policy and continue to reduce QE3 in the coming months, unless the U.S economy show signs of a sharp slow down. The minutes of the last FOMC meeting didn’t reveal much more about the Fed’s policy. The next FOMC meeting will be held during March 18-19.
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