Gold and silver September Outlook report - September 2013


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Gold and silver sharply rose during August. September's FOMC meeting could stir up the gold and silver market again. This meeting will be held during September 17-18. Until then, will gold and silver change direction from August and decline? Please find herein several short outlooks for the week of September 2-6 regarding forex and commodities.

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Gold and silver September Outlook report - September 2013

  1. 1. August Analysis September Outlook 2013 By Lior Cohen __________________________________________________________________________________________________ © All rights reserved – Trading NRG 1Page
  2. 2. Introduction Dear Reader, Thank you for downloading the recent precious metals market report. I hope this report will be interesting for you to read, and will provide you with some insight of the recent developments in the gold and silver markets during August and offer some perspective as to what is up ahead in the precious metals market in September 2013. I appreciate your feedback, so if you have any comments or suggestions don't hesitate to contact me. Thanks, Lior Cohen Tel Aviv. 1st of September 2013 Disclaimer Trading commodities, forex, stocks, options, ETFS etc. (trading) carries a high level of risk and may not be suitable for all investors. The risk grows as the leverage is higher. Investment objectives, risk appetite and the trader' level of experience should be carefully weighed before entering the trading market. There is always a possibility of losing some or all of your initial investment or deposit, so you should not invest money which you can't afford to lose. The high risk that is involved with trading must be known to you. Please ask for advice from an independent financial advisor before entering this market. This report is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Trading NRG and the authors of this report have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Trading NRG and any of its permitted authors make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Trading NRG and the authors of this report have not verified the accuracy or basis-in-fact of any claim or statement in this report: Omissions and errors may occur. Any news, analysis, opinion, price quote, forecast and outlooks or any other information contained on this report and Trading NRG's site and permitted re-published content should be taken as general market commentary. This is by no means investment advice. Neither Trading NRG nor any of its permitted authors, nor its providers of information, have any liability to the user, or any other third party, for the accuracy of any information, analysis, data, outlook or models contained in this report ,on Trading NRG's site, on other sites that have received permission to republish the content originating on Trading NRG and its reports, or for any errors or omissions therein, nor will Trading NRG or any of its permitted authors or any of its providers of information have any liability for the use, interpretation or implementation of the information or models contained herein by any person. Trading NRG and any of its permitted authors will not accept liability for any damage, loss, including without limitation to, any profit loss, which may either arise directly or indirectly from use of such information. Copyrights No part of this publication can be reproduced, distributed or transmitted in any form or by any means, electronic or mechanical, including recording or photocopying, or by any information storage and retrieval system, without written consent from the Author, except by a reviewer, who can make a brief quote in a review. __________________________________________________________________________________________________ © All rights reserved – Trading NRG 2
  3. 3. Table of Content 1.1 Preface……………………….……………………..……..…….…..….......Page 1 2.1 Gold and Silver Prices August 2013- Analysis …...….…....................…....Page 1 2.1.1 FOMC Monetary Policy – Update ………..….……..…..….....…Page 3 2.1.2 Europe’s Debt Crisis – Update ……………….…………….……Page 3 2.1.3 Gold Holdings in August……………………................................Page 4 2.1.4 Gold & Silver Prices and US Dollar ….….……..…......................Page 4 2.1.5 US Treasuries / Gold & Silver Prices – August ….…..…..............Page 5 2.1.6 Gold & Silver Prices and Other Indexes ……….…..………….....Page 6 3.1 Outlook for Gold and Silver Prices – September ………….……...……......Page 6 Appendix …………………………..………………….…….……..…...............Page 8 __________________________________________________________________________________________________ © All rights reserved – Trading NRG 3
  4. 4. 1.1 Preface Gold and Silver Prices Outlook for September 2013 The precious metals market has heated up this summer as both gold and silver prices spiked during August. Will the recent rally hold up and keep bullion prices elevated or will gold and silver prices change direction and fall? Many precious metals investors are waiting for the next FOMC meeting, in which the Fed may announce it will start tapering its asset purchase program. In the previous FOMC meeting, the monetary policy remained unchanged. Besides the FOMC meeting, let's breakdown the upcoming events and publications that may affect the precious metals market, which will unfold during the month; let’s also provide a short analysis for August. 2.1 Gold and Silver Prices August 2013 Gold and silver prices sharply rose during August. Their rally didn’t coincide with the movement of the Euro and Japanese yen against the USD. By the end of the month, gold increased by 6.35% (as of August 30th ); silver, by 19.61%. For silver this was the best performing month in the past several years. For gold, this was the second best performing month in 2013. Let's divide August into two parts: the table below divides the month at August 9th ; I divide the month to demonstrate the shift in pace of gold and silver prices; during the first part of August, gold remained flat; silver rose by 3.9%. During the second part of August, however, silver spiked by 15.1%; gold price rallied by 6.3%. During the first part of August, the U.S dollar depreciated against the Euro, Japanese yen and Aussie dollar; the Euro/USD and AUD/USD currency pairs are usually strongly correlated with gold and silver. During the second part of the month, the Euro, Aussie dollar, Canadian dollar and Japanese yen depreciated against the USD. The chart below presents the developments of gold and silver during August, in which the prices are normalized to 100 on July 31st 2013. The ratio of gold to silver (gold price/silver price) sharply fell during the month. The ratio decreased as silver price has out-performed gold price. During the month the ratio ranged between 67 and 57. _________________________________________________________________________________________________ © All rights reserved – Trading NRG 1Page
  5. 5. Here are several factors that may have positively affected gold and silver during August: 1. The appreciation of several currencies including Euro, Japanese yen and Canadian dollar during the second part of August; 2. Some U.S reports were not as good as many had anticipated: new home sales fell last month; Philly Fed index tumbled down during August; 3. The decision of BOE, BOC, and ECB to leave their respective cash rate unchanged in August; 4. According to the last U.S non-farm payroll report, 162k jobs were added – this was lower than expected any have pulled up gold and silver prices; 5. The decline of U.S equity markets that serve as an alternative investment for precious metals; 6. The appreciation of several currencies such as Euro and Aussie dollar at the first part of the month against the USD; 7. The pledge of the FOMC to keep its low rates until mid 2015; Here are several factors that may have adversely affected gold and silver prices during the month: 1. The minutes of the FOMC meeting didn’t offer new information but may have slightly curbed down the rally of precious metals; 2. The decision of RBA to lower its cash rate by 0.25pp to 2.5%; 3. Several U.S reports showed progress: Manufacturing PMI rose to 55.4; retail sales edged up by 0.2% during August; existing home sales jumped last month; GDP for the second quarter rose by 2.5%. These reports suggest the U.S economy is progressing and thus may have pulled down precious metals; 4. The recent decrease in the U.S jobless claims during most of August; 5. The depreciation of the Indian Rupee may have dragged down the demand for gold in India, among the leading importers of gold; 6. The depreciation of the Indian Rupee, which may have curbed the demand for gold and silver in India; 7. The depreciation of the Euro and Aussie dollar may have curbed the rally of gold and silver prices during the second part of the month; The correlation between gold and silver prices slightly strengthened during August compared to July. The correlation reached during August 0.885. This means the relation between gold and silver is stronger than it was in July. Moreover, the relation between the two precious metals remains positive and robust. If the correlation will remain strong, it could suggest the effect gold has on silver will remain robust (assuming of course you agree that gold is leading the way in this relation). __________________________________________________________________________________________________ © All rights reserved – Trading NRG 2
  6. 6. The standard deviations of gold and silver prices during August declined again compared with their standard deviations in July. This means, the volatility of gold and silver prices shrank in August. 2.1.1 FOMC Meeting – Update The main issue remains when the FOMC will decide to cut down its asset purchase program that includes $85 billion a month of long term securities. In the next meeting during September 17-18 the FOMC might announce it will reduce its asset purchase program. If the Fed doesn’t announce the tapering QE3, this could result in gold and silver prices resuming their rally. 2.1.2 Europe’s Debt Crisis – Update The EU economy continues to some signs of progress. Nonetheless, during the past two weeks, the Euro declined against the USD. The ECB kept its basic interest rate at 0.5%. The German elections are likely to result in Draghi keeping the rate unchanged so his actions won’t affect in some way these elections. If the ECB will keep its rate unchanged again, this could keep the Euro from further falling. 2.1.3 Gold Holdings during August Russia's gold holding slightly rose: During August, its hoards increased by 0.3 tons. There weren't any other substantial changes in gold holding among other top gold hording countries. The total global gold supply reached 31,909.70 tons – a 40.90 tons gain. __________________________________________________________________________________________________ © All rights reserved – Trading NRG 3
  7. 7. Conversely, by the end of August, the gold holding in the commercial gold trust SPDF decreased by 0.68% compared with its gold holding at the end of July. Despite the decline in holdings during the month, the ETF’s gold hoards increased in the past three weeks. This may signal a shift in the demand for gold as an investment. If this ETF’s gold hoards change direction and rise, it will signal indicate the demand for gold as an investment is picking up. A note: the linear correlation between the changes in the SPDF holding during the month and the price of gold is, as expected, strong and positive at 0.57. Thus, if gold price continues to rise, the holding in the SPDF is likely to pull up. 2.1.4 Gold & Silver Prices and U.S Dollar Here below are the correlations among major currencies and precious metals prices (up to August 30th ): The strongest correlations (in absolute terms) with gold price were the following exchange rates (in brackets are the linear correlation): USD/CAD (-0.41), Euro/USD (0.30), and AUD/USD (0.22); the strongest correlations with silver price were USD/CAD (-0.44), Euro/USD (0.35), and AUD/USD (0.27). The correlations of precious metals with some of these exchange rates weakened compared to the previous months especially the "risky currencies" such as Aussie dollar and Euro. Thus, these correlations suggest the daily developments in gold and silver prices were less related to the changes in the above-mentioned currencies pairs. Keep in mind the ongoing depreciation of the Indian Rupee against the USD (mainly at the end of the month) might have also affected the demand for precious metals; __________________________________________________________________________________________________ © All rights reserved – Trading NRG 4
  8. 8. India is among the leading countries in importing gold; if the Rupee will continue to depreciate it might indirectly and adversely affect precious metals prices. 2.1.5 US Treasuries / Gold & Silver Prices – August The US 10-year Treasury yields rose mainly during the first part of August. By the end of the month, the yield increased by 0.18 percent points. The chart below shows the daily shifts of gold price and 10 year daily Treasury bills yields during August (up to August 31st ). During most of August gold and 10-yr yields have had a negative correlation with gold and silver. In the chart below are the linear correlations between the daily shifts of long term U.S treasury bills yields and daily percent changes of precious metals prices. The strongest correlations between yields and gold were in the short term bonds (7 years). For the 10 year bonds the correlations between the yields and precious metals prices were also strong in the preceding month. If the FOMC will announce tapering QE3 this may contribute to the drop in demand for investments such as U.S LT and precious metals. 2.1.6 Gold & Silver Prices and Other Indexes Let's analyze the correlation of gold and silver prices with the major indexes including S&P500 and oil prices during August: During the month the S&P500 index has under-performed silver price and gold. If the S&P500 continues to fall, this may turn investor to stir away from equities and get back to precious metals. During August, there were negative and weak linear correlations between the daily percent changes of gold and silver prices and WTI oil price. This means the changes __________________________________________________________________________________________________ © All rights reserved – Trading NRG 5
  9. 9. in crude oil price during the month coincided with the changes of gold and silver prices. 3.1 Outlook for Gold and Silver Prices – September 2013 Let’s analyze several reports, markets and events that could influence bullion precious metals traders: According to the August report, the U.S employment increased by 162k jobs; this report tends to be negatively correlated with gold and silver prices via the U.S dollar. The table above presents the dates of the announcements of the U.S. labor report, the change in employment (column A), and the daily percent shifts for gold and silver prices on the day the labor report was published (column B and C, respectively). The correlations among precious metals and the changes in U.S. employment are mid- strong and negative. In the previous report the expectations were for 200k growth in employment. These correlations aren't significant, and may vary over time. Moreover, the expectations for the labor report tend to also play a role in affecting the direction of gold and silver price. If the next labor report (to be published on September 6th ) will show growth of more than 200k jobs, this may pull down gold and silver prices. The ECB will decide during the first week of September on its interest rate; in the previous ECB meeting the rate remained unchanged at 0.50%. Mario Draghi reiterated his pledge to leave rates unchanged in the near future. The current expectations are that ECB will keep its rate unchanged. If the Euro resumes its downward trend against the USD, this may adversary affect precious metals prices. Following the last FOMC meeting, which was held on July 30-31, the FOMC didn’t change its policy nor gave any strong hints regarding its future plans. On September 17-18 the FOMC will hold another meeting. This meeting is anticipated because many think this will be the one, in which the Fed will announce tapering QE3 or at __________________________________________________________________________________________________ © All rights reserved – Trading NRG 6
  10. 10. least will provide a more specific timetable. My guess is that the FOMC won’t start tapering QE3 this year considering the slow progress of the U.S employment, unclear direction in other aspects of the economy such as production and the lack of involvement of U.S policymakers in improving the economy. If the Fed doesn’t start tapering QE3, I think the positive effect on gold and silver won’t be strong considering their rally in the past couple of months. Conversely, if the Fed starts tapering QE3, this could result in gold and silver tumbling down. Let’s see why. In the table below are the recent FOMC meetings and the changes in the prices of gold and silver. The Federal Reserve's QE3 program to purchase long term securities at a monthly rate of $85 billion, and its pledge to maintain its short term interest rates low until mid 2015 continue to augment the U.S money base as seen in the chart below. Nonetheless, the chart above also presents the detachment of gold from the progress of the U.S money base. The linear correlation between these data sets (monthly changes, money base lagged by two months) weakened to reach only 0.12. The sharp increase in U.S money base doesn’t seem to pull up the price of gold as it may have done in previous years. Perhaps the fear of inflation has diminished in recent months. This finding suggests that even if the Fed keeps its asset purchase program, it will have little positive effect on gold and silver prices. But if the Fed tapers QE3, it could pressure down gold and silver prices. If the long term yields of the U.S. Treasury bills further rise, as they did in recent weeks, this could indicate that traders are taking more risk; thus, more investors are exiting bonds market and are getting into equities. Nonetheless, the slowdown in the U.S equity markets may have pushed investors towards precious metals. If stock markets continue to decline, this may pressure up precious metals prices. __________________________________________________________________________________________________ © All rights reserved – Trading NRG 7
  11. 11. The U.S government will need to decide in the coming months on further budget cuts. U.S policymakers already decided to cut $85 billion from the budget in 2013. This step may drag down the growth in U.S economy. If so, this might curb the rally of the equities markets and may pull up bullion rates. The correlations among precious metals prices and leading currencies have weakened in recent weeks. Thus, if major currencies continue to depreciate against the USD, they might slightly adversely affect precious meals prices. The ongoing depreciation of the Rupee against the USD during the month might have adversely affected the demand for gold. Furthermore, the decision of Indian policymakers to raise the base rate on import taxes earlier this year, may drag down the demand for gold in India, among the leading countries in importing gold. The FOMC meeting may affect the financial markets: If the Fed decides to taper QE3 this could result in gold and silver resuming their downward trend. My guess, however, the FOMC won’t start tapering its asset purchase program just yet. In such a case, precious metals might slightly rise. In the meantime, if the U.S economy shows signs of growth, this might persuade FOMC members to start tapering QE3 and thus it may pull down precious metals prices. Conversely, if U.S equities continue to fall, this is likely to strengthen the demand for gold and silver as alternative investments. In Europe, if the EU economy continues to show some progress and ECB keep interest rate unchanged, the Euro might rally, which may also positively affect gold and silver prices. The rise in recent weeks in the amount of gold held by GLD ETF suggests the demand for gold as an investment is starting to rise. Finally, if the demand for precious metals in China and India rise, this could positively affect the bullion market. In conclusion, I guess gold and silver prices might slightly rise during September. This rally, however, will not last long, if the U.S economy keeps growing and if the FOMC changes its monetary policy and cuts down its asset purchase program. Appendix Here are additional reports that might shortly affect precious metals prices: Housing Starts– In the August report, housing starts rose by 5.9% and is suppose to be negatively correlated with gold price (lagged by one day); if in the next report, the housing starts will continue to rise, it may pull down gold price (the next report will be published on September 18th ); Consumer Price Index – the U.S CPI rose again in July by 0.2%; the U.S. CPI is suppose to be positively linked with silver; thus, if the U.S. inflation will continue to rise in the September report, this might pull up silver price (the next report will be published on September 17th ); U.S Manufacturing PMI Survey – the Manufacturing PMI rose again to 55.4%, according to the latest September report referring to August – this means the manufacturing sectors in the U.S are growing at a faster pace; if this trend will persist, it could suggest the U.S economy is improving, which could adversely affect gold and silver (the next report will be published on September 3rd ). In any case, these reports have had moderate and short term effect (at best) on the path of gold and silver in the past; thus, these reports might continue slightly affect gold and silver rates in the short term. __________________________________________________________________________________________________ © All rights reserved – Trading NRG 8