Precious metals market tumbled down during most of the month along with many other markets including other commodities, stocks and foreign exchange markets. Both gold and silver were headed for their worst performing month of the year. The current rates are the lowest since December 2011. The decline in the Euro/USD may have also played a role in the fall of bullion. The speculation around Greece exiting the EU remains high and could be among the factors to drag down the Euro and bullion. Will this downward trend in precious metals prices continue in June?
Let’s analyze the bullion market for May and provide a short outlook for gold and silver prices for June 2012.
Gold and Silver May 2012
Gold and silver prices decreased during most of May, even though by the end of the month both precious metals have made a bit of comeback.
Gold (as of May 25th) declined by 5.59%; silver, even more than gold, dropped by 8.48%.
Let’s divide May into two parts: the table below divides the month to two with the breaking point at May 15th; I divide the month on May 15th because that was after the effects of the publication of the minutes of FOMC meeting were published and after it was settled the election in Greece will be held in June; during the first part of May, gold tumbled down by 6.4% and silver price by 9.5%. During the second part of May, silver rose by 1% and gold price by 0.9%.
During the first part of May, the U.S dollar sharply depreciated against the Euro, Canadian dollar and Australian dollar; these currencies are usually strongly correlated with gold and silver prices. During the second part of the month, the USD depreciated by a much lower rate against the Aussie dollar and Euro; this shift might have helped curb the fall of gold and silver prices during the second part of the month.
The chart below presents the developments of gold and silver prices during May, in which the prices are normalized to 100 on April 30th 2012.
The next chart shows the developments in the ratio of gold to silver during the month; the ratio has had a moderate upward trend. The ratio rose as silver has under-performed gold. In the last week of May the ratio ranged between 53 and 56.
Here are several factors that may have contributed to the decline of precious metals prices during May:
- The concerns during the first couple of weeks over the results of the French and Greek elections (see below for more);
- The tumble down of the Euro/USD during most of the month;
- The renewed speculation around the potential departure of Greece the EU(see below for more);
- The sharp deprecation in major currencies including Indian Rupee, Euro, Aussie dollar;
- The positive news from the U.S economy mainly in the housing market;
- The decrease in U.S long term securities yields during the month (see below for more on this issue);
- The U.S. federal deficit contracted by 59 billion during April 2012; this contraction lowered a bit the uncertainty level in the market;
Here are several factors that may have curbed the decline of bullion during the month:
- The U.S labor report of May showed a modest gain in U.S. employment of only 115k; this report is usually negatively correlated with bullion rates (see below);
- The ongoing FOMC pledge to keep rates low until late 2014;
- The news regarding the moderate contraction in the U.S Philly Fed Index;
The complete monthly report is coming soon…
Outlook for Gold and Silver – June 2012
In conclusion, I still speculate gold and silver will continue to dwindle in the weeks to follow. The ongoing concerns regarding the stability of the EU and the potential departure of Greece is likely to further strengthen the U.S dollar and weaken the Euro. If the upcoming Greek elections won’t turn out well it could further drag down the Euro. If the U.S economy will continue to show signs of recovery it could lower the chances of another FOMC monetary intervention. All these items mount up to bullion further trading down. The upcoming U.S labor report could have some impact on the market if the numbers will be much different than last month’s figures. The upcoming FOMC meeting could also play a role in the markets if there will be big headlines coming out of it. If major currencies including Euro, Aussie dollar, and Indian Rupee will continue to trade down against the USD, bullion rate are likely to follow. Nevertheless, as long as the FOMC will keep the door open on another stimulus plan, bullion rate will likely to remain high.
For further reading:
- How will a Greek Exit Affect Gold and Silver?
- Gold and Silver Weekly Outlook for May 28- June 1
- What Are the Potential Outcomes for Gold in 2012?