Gold and Silver Prices Monthly Outlook for October 2011

Gold and silver prices demonstrated during September one of the worst performance in recent years. After the sharp rally in gold price during August as it nearly reached the $1,900 mark, gold price tumbled down to below $1,600 mark, while silver price also followed and fell below the $30 mark. What were the main factors that contributed to these large falls in September? These factors include the FOMC decision to purchase long term securities, the CME margin requirements hike on gold and silver contracts and the shift of traders during the second part of September away from traditional safe haven investments. Despite the sharp falls in precious metals’ prices, the high uncertainty in the financial markets is still high vis-à-vis the speculations around the U.S. Economy’s slowdown and the debt crisis in Greece. So what is next for gold and silver prices in October 2011? Let’s examine the metals market for September and provide an outlook for gold and silver prices for October 2011. 

Gold and Silver Prices September 2011

Gold and silver prices started the month with moderate changes that shifted towards the second part of the month to very sharp falls.

Gold price ended September with an 11.4% decrease and silver price tumbled down by 28.0%.

The table below divides the month into two parts with the breaking point at September 14^th; during the first part of September, gold price slipped by 0.3%, while silver price fell by 3.0%. But during the second part of September, silver price sharply declined by 25.8%, and gold price tumbled by 11.2%.

During the first part of September, the US dollar appreciated against the Euro, Australian dollar and Canadian dollar, in which the two latter currencies are usually strongly correlated with gold and silver prices; during the second part of September, the US dollar continued to appreciate against the YEN, AUD and CAD, but at a much higher rate (e.g. the USD/CAD rose by 6.2%); this shift is consistent with the sharp changes in gold and silver prices‘ movement.  The chart below shows the changes in gold and silver prices during September, in which the prices were normalized to 100 on August 31^st 2011.

The next chart presents the changes in the ratio of gold price to silver price (gold price/silver price) during September; the ratio didn’t change much during the first couple of weeks of the month until September 21^st when the FOMC announced its stimulus plan that may have caused a shift in direction of gold and silver prices. The ratio sharply rose as silver price underperformed gold price. In the past few days of September the ratio stabilized around the 52-54 mark.

 

Here are several factors that may have affected gold and silver prices to decline during September:

1. The CME raises the margin requirements for gold and silver contracts (see below);
2. The FOMC decision to implement a stimulus plan in which the Fed will purchase LT securities and sell ST securities until June 2012 (see below);
3. The strengthening of US dollar compared with the riskier currencies including Euro, Austrian Dollar, Canadian dollar during September especially during the second half of the month;
4. New hope that EU policymakers are taking actions to stabilize the financial communities;
5. Shifts in the sentiment of traders as traditional “safe haven” investments were traded down.

Here are several factors that may have affected gold price and silver price and curbed their downfall:

1. The debt crisis in Europe is still real and near and the speculation around Greece’s default on its debt, and Italy’s rating downgrade didn’t help ease the concerns of many investors.
2. The US labor report for August that showed no increase in U.S. employment;
3. The increase in gold holding by governments during September (see below);
4. The sharp falls in the U.S. stock market indexes mainly during the first half of September (see below);
5. The rapid falls in long term US Treasury bills yields mainly during the first half of the month (see below);
6. The moderate growth in the U.S. federal deficit during August 2011 by $134 billion as this conditions raised the level of uncertainty the market.

The sharp falls of gold and silver prices during September strengthened the relation between the two bullion prices as the correlation between the daily percent changes of gold and silver prices sharply rose to 0.858 – the highest correlation level since March 2011.

 

For further reading:

•  Gold and silver prices outlook for September 2011

Lior Cohen, M.A. commodities analyst and blogger at Trading NRG.