Gold and silver prices started off the month of May with sharp falls; nevertheless, they have managed to bounce back by the end of the month; even though they didn’t return to their price levels at the beginning of May. Will the recent rally in precious metals prices continue throughout June? Let’s examine the gold and silver market for May and try to provide an outlook for gold and silver prices for June 2011.
Gold and silver prices May 2011
As seen in the chart below, both precious metals fell very precipitately at the beginning of May: silver prices fell by 27.3% up to May 17th, and gold prices declined by 5%; from May 17th up to May 31st gold prices rose by 3.8%, while silver prices increased by 14.4%.
By the end of the month, gold prices fell by only 1.3% and silver prices by 21.2%.
The chart above shows the changes of gold and silver prices during May, in which the prices are normalized to 100 on May 2nd 2011.
These rapid fluctuations also changed the ratio of gold to silver prices as presented in the chart below.
It shows that at the beginning of May the ratio rose as silver price fell at a higher rate than gold price did. By the end of the month, as silver price inclined at a higher rate than gold price did, the ratio moderately declined.
Despite the harsh fall of silver price during the first half of the month the correlation between gold and silver prices remained high.
Among the main reasons for the declines in silver prices and gold prices at the beginning of May are:
- The strengthening of US dollar compared with other major currencies (see below);
- The rise of the silver margins for traders by CME (see here for more on the silver margins increase in May);
On the other hand, among the reasons for the rally in gold and silver prices at the second half of May include:
- The weakening of US dollar compared with other major currencies (see below);
- 2. The recommendations of top investment banks including Goldman Sachs and JP Morgan to go long on major commodities including gold.
These factors are not the only ones that affected the precious metals market, but they are probably among the main factors that shifted gold and silver prices during May.
Gold and silver prices and US dollar
During May, the major currencies presented a tight correlation with gold and silver prices as presented below:
The strongest correlation (in absolute terms) of gold and silver prices with an exchange rate was with AUD/USD, and USD/CAD followed by EURO/USD, and finally with USD/YEN.
Except for the USD/YEN exchange rate, all other abovementioned exchange rates coincided with the following relation between precious metal prices and US dollar: as US dollar’s value rises compared with other currencies, gold and silver prices declined.
The table below shows percent changes of these indexes at the first and second half of May.
In the first half of May as the US dollar strengthened compared with other currencies, while gold and silver prices fell; in the second half of May, as the US dollar weakened compared with other currencies, gold and silver prices inclined;
Gold and silver prices and other indexes
Were there other indexes correlated with gold and silver prices?
As in the chart below gold and silver prices were strongly correlated with S&P500 during May, even though there were very weak correlations between gold and silver (daily percent changes) and S&P500 (see here a full analysis of the relation between these indexes).
During May, there was also a very strong correlation between the daily percent changes of gold and silver prices and WTI spot oil price. This might indicate that the factors that affected crude oil prices’ direction during May might have also affected the direction of precious metals prices’ direction.
Outlook for silver and gold prices – June 2011
In June the quantitative plan – phase 2 is suppose to end, but the US economy is still far from recovering its recent recession; if the Federal Reserve will come up with a new stimulus plan that will also have an adverse effect on the US dollar and consequently weaken the US dollar compared with other major currencies, this might push gold and silver prices back up.
On the other hand, the debt crisis in Europe only deepens; this will likely keep US dollar strong compared with the EURO, and will consequently curb the rally of gold and silver prices.
Since the uncertainly around the recovery of major economies including US, Euro zone and Japan are still high, and there is still an ongoing fear in the financial markets, I still speculate that in the short term, during June, we will slowly see a rally of gold and silver prices.
For further reading (in this site):
- How did gold and silver perform compared to S&P500 during May?
- Gold and silver prices outlook May 2011 – what’s next for gold & silver?