During January, gold price demonstrated its strongest performance in a single month since August 2011; for silver price it was since July 2011. Gold is currently 10.76% above its price from the end of 2011; silver has added 21.05% to its value. What were the driving forces for this rally in gold and silver prices during January? Part of it might have to do with the recent pledge of the FOMC to keep rates low until late 2014 and the “January effect” that trade up the American stock markets. Will this rally of gold and silver prices continue in February 2012? Let’s analyze the precious metals market for January and provide a short forecast for gold and silver prices for February 2012.
Gold and Silver Prices January 2011
Gold and silver prices started January rising; this trend, however soon turned into very sharp gains.
Gold price ended January (as of January 29th) with a 10.76% gain and silver price rose by 21.05%.
Let’s divide January into two parts: the table below divides the month to two with the breaking point at January 13th; during the first part of January, gold price rose by 4.1% and silver price by 5.8%. During the second part of January, silver price rose by 14.5% and gold price by 6.4%.
During the first part of January, the U.S dollar slightly appreciated against the Euro and Canadian dollar, but traded down against the Australian dollar; the last two currencies are usually strongly correlated with gold and silver prices; during the second part of January, the U.S dollar sharply depreciated against the Euro, Australian dollar and Canadian dollar; this shift might partly explain the sharp increase of gold and silver prices during the second part of the month. The chart below presents the changes of gold and silver prices during January, in which the prices are normalized to 100 on December 30th 2011.
The next chart presents the development of the ratio of gold to silver (gold price/silver price) during January; the ratio had a downward direction during most of the month especially during the last couple of weeks. The ratio fell as silver price has outperformed gold price. In the last week of January the ratio stabilized around 51-52 – the lowest level since November 2011.
Here are several factors that may have contributed to gold price and silver price to augment during January:
- The FOMC pledge to keep rates low until late 2014 (see below for more on this issue);
- The rally in the U.S. stock market indexes during the month, which was probably stem, in part , from the January effect (see below);
- The U.S. federal deficit expanded by 85 billion during December 2011; this expansion raised the uncertainty level in the market;
- The appreciation of the Australian dollar, and Euro against the U.S. dollar during most of January mainly during the last weeks of the month;
- The decline in the U.S. housing market (including the drop in housing starts);
- The rise in the U.S GDP growth rate in the fourth quarter by 2.8%;
- The fall in U.S long term securities yields during the last week of January (see below);
Here are several factors that may have curbed the rally of gold and silver prices during January:
- The European debt crisis continues to influence traders and raise the uncertainty level in the markets. This may have curbed the rally of precious metals during the first weeks of January via the strengthening of the US dollar;
- The U.S labor report for January showed a sharp increase in U.S. employment by 200k; this report is usually negatively correlated with gold and silver prices (see below);
Gold and silver prices continued their strong positive relation, even though the linear correlation between gold and silver fell to its lowest level since August 2011; the linear correlation between the daily percent changes of gold and silver reached 0.773 in January.
Furthermore, the volatility of gold and silver prices in January continued to decline: during January, the standard deviation of the daily percent changes of gold price reached its lowest level since July 2011 and for silver the lowest level since April 2011.
Outlook for Gold and Silver Prices – February 2012
Here are several factors to consider that may influence the direction of gold and silver:
The ECB will decide during the second week of February its rate; in January the ECB President kept the rates at 1.00%. If the ECB will lower the rate, this may curb the recent rally of gold and silver.
The European debt crisis has had a negative effect on the Euro and this in turn may negatively affect gold and silver.
CME margins: the CME raised margins on gold contracts three times in recent months the last time was back in September 2011. The volatility of gold and silver is contained, but they were traded sharply up in recent weeks. This might prompt CME to raise the margin which will eventually drive precious metals down.
In the January report, the U.S labor added 200k jobs to the labor force. This report has had a negative correlation with gold and silver via the U.S dollar.
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