Gold prices outlook for April 2011 – what’s next for gold?

The leveling out of gold prices during March came after gold prices rose during February. What will be of gold in April? Let’s examine the gold market and try to come up with a forecast for gold prices in April 2011:

Gold prices showed a steady upward trend, while silver prices rose much more precipitately since the beginning of February 2011 as seen in the chart below:

Gold and Silver prices normalized 2011 The following chart shows the strong correlation of AUD/USD to gold and silver prices. This shows that Australia, one the top exporters of gold worldwide, has a strong relation with gold prices, and that the recent rally of AUD /USD might coincide with the rally of gold and silver prices.

 

Correlations Gold & Silver Prices and major currencies Dec 2010- March 2011

How will the gold prices react in April? There are reasons for gold prices moving up in the next several weeks to come, and there are also reasons for gold price to show some weakness. Let’s break it down the reasons for each direction:

The major reasons for staying bullish about gold are:

  1. The US economy continues to be weak: The US labor report didn’t show much improvement in employment during 2011, despite the stimulus plans of the Fed. On the other hand, its GDP grew in the last quarter by 2.8% (annual). Thus, there is some improvement but the US economy’s condition is still dire. As long as the US economy is weak, many investors will hesitate to invest in US economy’s financial instruments (e.g. government bonds);
  2. China and India’s growing economics: these two countries continue to rapidly grow, and their rising demand for gold coincides with these economies growth. China is trying to cool down its rapidly growing inflation, which is higher than the inflation during the parallel time in 2010.  China’s central bank even decided to  raise its requirements for commercial banks’ reserves to 19.5% in an attempt to fight inflation; it also raised the basic interest rate up to 6.1%, and yet China continues to seem not affected by these steps so far; therefore, as long as these economies will continue to be strong, their rise will probably reflect in high demand for gold;
  3. Japan’s tsunami aftermath: Bank of Japan decided to “print” 15 trillion yen (about 183 billion US dollar), in order to cope with its disaster. This decision might have affected major currencies such as Yen and USD, because BOJ has a lot of US dollars in its reserves, and it will probably start to sell them in order to finance the recovery of Japan’s economy. If so, this might depreciate the US dollar and drive investors and traders towards commodities such as gold and silver. Notice that there was a declining correlation between USD/YEN and gold or silver prices during the last several months. Will this declining correlation continue is remains to be seen.
  4. The uncertainty in the Middle East: The same goes for the Euro area and the Euro as Ireland and Greece fell in 2010 and 2009, respectively and weaken the Euro area and its currency, and drove many investors to the commodities market and away from Euro area investment;

 

Correlations Gold & Silver Prices and yen usd Dec 2010- March 2011

Reasons for seeing eventually (the only question is when) of gold prices falling:

  1. Japan’s tsunami aftermath: Japan is a major importer of gold so that this recent attack might downsize the amount of gold it imports;
  2. Gold demand/supply: The gold supply remains high compared to the current demand (see the table below) as there is still a surplus on a worldwide level. Thus the market isn’t tight. This implies that the speculation around gold will likely to affect gold prices than actual supply and demand forces as the price is mostly driven by speculators and investors who seek out a safe haven for their cash;
  3. Silver cheaper than gold: As we have seen in the past several months, the ratio of the gold to silver has been declining (see chart below). I think this shift has to do with silver being a precious metal that investors could rely with similar attributes as gold from an investment point of view, only much cheaper. Therefore, I speculate that hot money might be directed towards silver over gold.

Chart of changes in demand and supply:

Table of Spot Gold price demand and supply 2009-2010

Chart of gold prices to silver prices ratio during 2011

Gold and Silver prices ratio 2011

Gold prices Outlook in April and beyond

In April, gold prices will probably continue to level out with no clear trend and a slight upward trend. The main uncertainty will be the ramifications of Japan’s tsunami on the financial markets. If Japan will manage to present confidence, then this might positively affect the stability of the financial markets and won’t pressure gold or silver prices to rise.  In the long run, I still speculate that as the major economies continue their recovery (mainly US), we will probably see a shift back to their financial markets, which may cause gold and silver prices to fall. This scenario will probably won’t happen anytime soon, but I think that eventually we will see it coming as the current price are way too high for these commodities.

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