Precious metals prices resumed their upward trend mainly during the first couple of weeks of the September in anticipation of many bullion traders for another intervention of the FOMC. This bet paid off because on September 13th the FOMC announced it will commence QE3 with no time limit. This news, however seems to have had, for now, a short term effect as the prices of precious metals remained nearly unchanged during the rest of the month. I have referred to this issue in a recent article and think that the prices of gold and silver will resume their rally in the months to follow. On the other hand, the recent developments in Europe, including the riots in Spain, Greece and Italy, may have curbed the recovery of not only bullion prices but also the Euro. The rally of Euro/USD, mainly during the first couple of weeks of September, coincided with the rise of precious metals prices. Will this upward trend continue during October? The main events of the month will continue to be around the FOMC, the EU debt crisis and the economic progress of China and India, the two leading importers of gold. The FOMC will convene during the final week of October. Bernanke will give a speech and the Fed will release the minutes of the recent FOMC meeting on the first week of October. The ECB will announce its interest rates and might commence a bond purchase program to help Spain in raising debt. In October, there will also be a Summit of the financial ministers of the G7.
Let’s analyze the precious metals market for September and provide a short outlook for gold and silver for October 2012.
Gold and silver rates started off the month strong as both precious metals hiked during the first half of the month but then they changed pace and remained nearly unchanged during the second half of the month. Most of the growth in prices came in anticipation of many traders that the FOMC will announce of September 13th of its launch of QE3, which turned out to be the case.
During the month, gold rose by 5.11%; silver, even more than gold, hiked by 9.97%. This was the best performing month for gold since January 2012.
Let’s divide September into two parts: the table below divides the month at September 13th; I divide the month in order to demonstrate the sharp shift in the pace of change of both gold and silver rates; during the first part of September, gold rose by 5% and silver price by 10.6%. During the second part of September, silver edged down by 0.2% and gold price rose by 0.1%.
During the first part of September, the U.S dollar also sharply depreciated against the Euro; the Euro/USD currency pair is usually strongly linked with gold and silver prices. During the first part of the month, the U.S dollar sharply depreciated against the Euro, Canadian dollar and Australian dollar; this shift might have also contributed to the rally of gold and silver prices during the first part of the month.
The chart below shows the changes of gold and silver prices during September, in which the prices are normalized to 100 on August 31st 2012.
The next chart presents the shifts in the ratio of gold to silver (gold price/silver price) during September; the ratio had a modest downward trend mainly during the first part of the month. The ratio fell as silver price has out-performed gold price. In the last week of September the ratio ranged between 50 and 54.
Here are several factors that may have contributed to the rally of gold and silver during the month:
- The decision of the FOMC to launch QE3 (see below for more);
- The pledge of the FOMC to keep rates low until mid 2015;
- The recent U.S non-farm payroll report that was much lower than expected and thus raised the odds of an intervention of the FOMC in a form of a stimulus plan;
- The decision of the Bank of Japan to expand its stimulus plan by 10 trillion yen;
- The expectations from China to issue additional easing steps to help jump-start its economy;
- The growth in demand for gold in India, the world’s biggest consumer, on account of the underway of the festival and wedding season and the appreciation of the Rupee;
- The rally of the Euro/USD during the first part of the month;
- The fall in the U.S jobless claims on the last week of September;
- The slow improvement in the U.S as presented by the Philly Fed index and U.S GDP; this slow growth is likely to raise the speculation of another intervention by the FOMC in the near future;
- The expectations of the market from ECB to introduce of bond purchase program so that the Bank will start to purchase Spanish bonds;
- The U.S. federal deficit expanded by 190 billion during September 2012 – the highest monthly deficit since March 2012; this expansion raises a bit the uncertainty level in the market;
In conclusion, I speculate gold and silver will continue their upward trend as the effect of QE3 will continue to pull them up. If the U.S economy will continue to show little progress in the labor and manufacturing sectors (Philly Fed, PMI manufacturing) this could have a mixed effect on bullion rates: it could pull them up via the rise in the chances that another stimulus plan by the Fed will be introduced in the near future, but it could also adversely affect them via the negative effect it will have on U.S stocks, commodities prices and LT yields. The expectations of an intervention by ECB to ease Spain’s debt crisis might pull up the Euro, which is strongly and positively correlated with precious metals prices. If Spain will continue to wait with this bond program and the situation in Italy and Greece won’t progress then this could pull down the Euro as was the case during the last couple of weeks on September. The recent appreciation of the Indian Rupee and expected rise in demand for gold (seasonal effect) is likely to positively affect gold. I suspect all these items mount up to bullion trading up. Finally, if major currencies including Euro and Aussie dollar will trade up against the USD, then this could help rally bullion rates.
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