Precious metals prices resumed their downward trend during December. This downward trend, however, was less related to the movement of the USD or the changes in other commodities prices and was plausibly related to other factors. These factors could include the changes in the supply/demand for gold, the speculations around the next move Paulson, and the change in market sentiment towards gold and silver (after all these metals haven’t perform well in the past couple of years). Several U.S reports showed signs of progress: the U.S GDP growth rate for Q3 2012 was revised up to 3.1%; non-farm payroll rose by 146 thousand in November. These reports may have contributed to the downward trend of precious metals during December. The U.S budget talks and the last attempts to avoid the fiscal cliff might affect the markets if there will be any last minute developments. Nonetheless, beyond the fiscal cliff, the U.S government could still introduce additional tax cuts to be negotiated in the months to follow. The outcome of these talks could affect not only the USD but also precious metals. The EU leaders will also resume their talks regarding the EU multi year budget in the weeks to come that could affect not only the Euro but also commodities rates. Will gold and silver continue to decline during January? The main events of the month will be the minutes of the recent FOMC meeting, the aftermath of the fiscal cliff debates, the ECB rate decision, and the economic progress of U.S, China, and Europe.
Let’s examine the precious metals market for December and give a short outlook for gold and silver for January.
Gold and Silver Prices December 2012
Gold and silver rates started off the month declining. But then the movement of gold and silver slowed down and as they only moderately declined during the last two weeks of December. During the month, gold declined by 3.27%; silver, by 9.89%.
Let’s divide December into two parts: the table below divides the month at December 19th; I divide the month to demonstrate the change in the pace of both gold and silver; during the first part of December, gold fell by 2.6% silver by 6.5%. During the second part of December, silver declined by 3.6%; gold price, by 0.7%.
During the first part of December, the U.S dollar depreciated against the Euro, Aussie and Canadian dollar; the Euro/USD and AUD/USD currency pairs are usually strongly correlated with gold and silver prices. Conversely, during the second part of the month, the Euro/USD and AUD/USD slipped. The depreciation of the USD may have curbed the decline of gold and silver.
The chart below presents the developments of gold and silver prices during December, in which the prices are normalized to 100 on November 30th 2012.
The next chart shows the movements in the ratio of gold to silver (gold price/silver price) during December; the ratio had a modest upward trend. The ratio rose as silver price has under-performed gold price. In the last week of December the ratio ranged between 54 and 55.
Here are several factors that may have pressured down of gold and silver prices during the month:
- The recent U.S non-farm payroll report was well above 120k and tend to be negatively linked with gold and silver prices;
- Several U.S reports were positive and showed progress for the economy: the Philly Fed index hiked, retail sales also increased. These reports may have pulled up the USD;
- The decline in the U.S jobless claims during most of December;
- The slow deprecation of the Indian Rupee may have pulled down the demand for gold in India, among the leading importers of gold;
- The improvement in the U.S as presented by the rise in housing starts and U.S GDP; this slow growth is likely to cut the odds of the FOMC intervening again in the near future;
- The depreciation of several currencies including Aussie dollar during December;
- The moderate decline in the U.S money base during recent months (see below for more).
In conclusion, I speculate gold and silver will continue to trade down during the month even though there could be a rise in volatility in precious metals prices. The rise in the U.S money base, partly due to QE3, may curb the decline in bullion prices. Unless U.S policymakers will be able to avoid the fiscal cliff, these budget cuts are likely to pull down the USD and also raise the odds of the Fed intervening again in the money market and thus may pull up precious metals in the months to follow. Conversely, if the U.S economy will continue to show progress in the labor, housing and manufacturing sectors (non-farm payroll report, housing starts and PMI manufacturing) this could pull down bullion rates. If the U.S stocks markets will rally this month (January effect), then they could pull down gold and silver. The ongoing depreciation of the Indian Rupee is likely to adversely affect bullion rates. I still guess that even though the prices of gold and silver will sharply shift throughout the month, their general direction will be upward. The speculations around Paulson’s intention to cut its position in gold, might eventually lead to further drop in gold and silver prices; assuming these speculations will be founded and the GLD ETF will show a drop in the amount of gold it owns. Finally, if major currencies including Euro and Aussie dollar will appreciate against the USD, then this could also curb the demand for gold and silver.
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