Gold and silver prices changed direction and sharply fell during most of December. Gold price ended the month 10.5% below its initial level, and silver price declined by 14.9%. What were the main factors that may have caused the sharp drop in gold and silver prices during December? Part of it might have to do with the disappointment of many investors at the FOMC for not issuing a stimulus plan (QE3); additional factors may include the ongoing uncertainty in the EU regarding the European debt crisis and signs of the U.S economy’s slow recovery. So what is next for gold and silver prices in January 2012? Let’s examine the metals market for December and provide a quick outlook for gold and silver prices for January 2012.
Gold and Silver Prices December 2011
Gold and silver started the month of December with moderate changes that very quickly turned into sharp falls.
Gold ended December with a 10.5% decrease and silver declined by 14.9%.
Let’s divide December into two parts as in the table below with the breaking point at December 15th; during the first part of December, gold fell by 9.9% and silver by 10.8%. But during the second part of December, silver declined by only 4.6%, and gold by 0.7%.
During the first part of December, the U.S dollar sharply appreciated against the Euro, Australian dollar and Canadian dollar, in which the first two currencies are usually strongly correlated with gold and silver prices; during the second part of December, the U.S dollar only moderately appreciated against the Euro and depreciated against the Australian dollar and Canadian dollar; this shift might partly explain the sharper fall of precious metals during the first part of the month.
The chart below presents the changes in gold and silver prices during December, in which the prices were normalized to 100 on November 30th 2011.
The next chart shows the development of the ratio of gold price to silver price (gold price/silver price) during December; the ratio had an upward trend during most of the month. The ratio rose as silver price underperformed gold price. In the last week of December the ratio stabilized around the 56-57 mark.
Here are several factors that may have affected gold and silver to rise during December:
- The gains in the U.S. stock market indexes during the first half of the month (see below);
- The growth in the U.S. federal deficit during November 2011 by $137 billion that raised the level of uncertainty in the market;
- The rally of the AUD and CAD against the U.S. dollar during the second part of the month; this helped keep the bullion prices up;
- The revised down growth rate of U.S.’s GDP in Q3 2011;
Here are several factors that may have pushed gold and silver prices to decline during December:
- The disappointment of traders at the FOMC for not issuing a stimulus plan (QE3);
- The European debt crisis continues to affect traders and raise the anxiety level in the markets. This may have affected precious metals to trade down via the strengthening of the US dollar;
- The U.S labor report that was published in December showed an increase in U.S. employment and this report is usually negatively correlated with gold and silver prices (see below);
- The decline in long term U.S Treasury bills yields mainly during the first half of the month (see below);
- The strengthening of U.S dollar compared with the riskier currencies such as Euro and Austrian Dollar, mainly during the first half of December;
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