Trading Nrg - Gold and silver outlook report - January 2014

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Gold and Silver Prices Outlook for January 2014
The last FOMC meeting of the year ended with a mini-taper of $10 billion so that
quantitative easing 3 will continue to purchase $75 billion a month of LTS and
MBS. This decision may have had a moderate adverse effect on the prices of gold
and silver. By the end of the month, both precious metals slightly declined.
Moreover, on a yearly scale gold and silver tumbled down by 28.2% and 35.9%,
respectively. Thus, precious metals recorded their worst annual performance in
decades (yes you are reading it right in decades). Looking forward, will gold and
silver continue to tumble on the first month of 2014? Let's examine the upcoming
events, decisions and reports that may affect precious metals; let’s start, however,
with a short analysis of December.

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Trading Nrg - Gold and silver outlook report - January 2014

  1. 1. December Analysis January Outlook 2014 By Lior Cohen Page 1 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  2. 2. Introduction Dear Reader, Thank you for downloading the latest gold and silver market research report. I hope this report will be interesting for you to read, and provide you with some insight of the recent developments in the gold and silver markets during December and some perspective as to what is up ahead in January 2014. I appreciate your feedback, so if you have any comments or suggestions don't hesitate to contact me. lior@tradingnrg.com Thanks, Lior Cohen Tel Aviv. 2nd of January 2014 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. 2 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  3. 3. Table of Content 1.1 Preface……………………….……………………..……..…….…...….......Page 1 2.1 Gold and Silver Prices December 2013- Analysis …..…......................…....Page 1 2.1.1 FOMC Monetary Policy – Update …………….…….………....…Page 3 2.1.2 Europe’s Economy – Update…………………..…………….……Page 3 2.1.3 Gold Holdings in December………..………..................................Page 3 2.1.4 Gold & Silver Prices and US Dollar ….………..…........................Page 4 2.1.5 US Treasuries / Gold & Silver Prices – December ….…................Page 5 2.1.6 Gold & Silver Prices and Other Indexes ……….…..…….…….....Page 6 3.1 Outlook for Gold and Silver Prices – January ………….……...……..……..Page 6 Appendix …………………………..………………….…….……..…................Page 9 3 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  4. 4. 1.1 Preface Gold and Silver Prices Outlook for January 2014 The last FOMC meeting of the year ended with a mini-taper of $10 billion so that quantitative easing 3 will continue to purchase $75 billion a month of LTS and MBS. This decision may have had a moderate adverse effect on the prices of gold and silver. By the end of the month, both precious metals slightly declined. Moreover, on a yearly scale gold and silver tumbled down by 28.2% and 35.9%, respectively. Thus, precious metals recorded their worst annual performance in decades (yes you are reading it right in decades). Looking forward, will gold and silver continue to tumble on the first month of 2014? Let's examine the upcoming events, decisions and reports that may affect precious metals; let’s start, however, with a short analysis of December. 2.1 Gold and Silver Prices December 2013 Gold and silver prices declined mostly during the last few weeks of December. Their decline did coincide with the depreciation of the Euro, Aussie dollar and Japanese yen against the USD. By the end of December, the price of gold decreased by 3.85%; the price of silver, by 3.3%. Let's divide December into two parts: the table below divides the month at December 11th. This point is where the speculations regarding the tapering of QE3 further rose. I divide the month to demonstrate the shift in pace of gold and silver prices; during the first part of December, gold rose by 0.6%; silver, by 1.6%. During the second part of December, however, gold plummeted by 4.4%; silver price, by 4.8%. During the first part of December, the U.S dollar depreciated against the Euro but slipped against the Aussie dollar, Japanese yen and Canadian dollar; the Euro/USD and USD/Yen currency pairs are usually strongly correlated with gold and silver – in recent weeks, however, their relation diminished. During the second part of the month, the Japanese yen sharply depreciated against the US dollar. The chart below presents the changes of gold and silver during December, in which the prices are normalized to 100 on November 29th 2013. Page 1 _________________________________________________________________________________________________ © All rights reserved – Trading NRG
  5. 5. The ratio of gold to silver (gold price/silver price) slightly fell during the month. The ratio decreased as silver price has out-performed gold price. During the month the ratio ranged between 61 and 63. Here are several factors that may have adversely affected gold and silver prices during the month: 1. The decision of the FOMC to mini-taper QE3 starting January; 2. In the recent U.S non-farm payroll report, 203k jobs were added – this was close to estimate and may have slightly dragged down precious metals prices; 3. The higher than expected correction to the U.S third quarter GDP – raised to 4.1%; 4. The sharp depreciation of several currencies such as Aussie dollar and Japanese yen against the USD during December may have pulled down gold and silver; 5. The approval of the U.S budget lowered the uncertainty of the U.S economy heading towards 2014 with respect to this issue; 6. The decline in the number of U.S jobless claims during December; 7. Most U.S reports were positive: Housing starts sharply rose by 22% during December; retail sales increased by 0.7%; manufacturing PMI rose to 57.3%; U.S consumer confidence index rose during the month. These reports suggest the U.S economy is progressing and thus may have dragged down precious metals; 8. The ongoing rally of U.S equity markets that serve as an alternative investment for gold and silver; Here are several factors that may have positively affected gold and silver during December: 1. The decision of the FOMC to maintain its interest rate until the end of 2015; 2. The decision of ECB, BOE, BOC, and RBA to maintain their respective cash rate flat in December; 3. The appreciation of the Euro against the USD during December may have curbed down the tumble of gold and silver prices; 2 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  6. 6. 4. The appreciation of the Indian Rupee may have slightly and positively affected the demand for gold in India, among the leading importers of gold; 5. Some U.S reports showed little progress: Philly Fed index remained flat during December. The correlation between gold and silver prices strengthened during December compared to November. The correlation reached during December 0.968 – its highest level this year. If the correlation remains robust, it could suggest the effect gold has on silver will remain strong. The standard deviations of gold and silver prices also rose during December compared with their standard deviations in November. This means, the volatility of gold and silver prices expanded in December. 2.1.1 FOMC Meeting – Update In the recent FOMC meeting the FOMC decided to lower its $85 billion a month asset purchase program by $10 billion. This news wasn’t the only issue discussed in the meeting. The FOMC members wished to convey to the public that this step of tapering QE3 doesn’t suggest the Fed is likely to start raising its cash rate anytime soon. The current talks are that the Fed’s cash rate may remain low until late 2015. This news should keep the prices of gold and silver from tumbling any further. Moreover, since QE3 had little positive effect on gold and silver, this might suggest, but not necessarily, that the tapering of QE3 will have little long term adverse effect on the prices of gold and silver (more on that below). The minutes of this meeting will be released on January 8th and the next meeting, this time under Yellen, will be held during January 28-29. If another tapering will be announced, it could have some short-term adverse effects on precious metals. 3 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  7. 7. 2.1.2 Europe’s Economy – Update The EU economy continues to slowly progress. The ECB’s decision back in November to lower the cash rate to its lowest level of 0.25 didn’t stop Euro from recovering against the USD. But this rally seems to have had little positive effect on the prices of precious metals, as indicated by the very weak correlation between Eur/USD and precious metals (see below). For now, it seems less likely that the ECB will further reduce its cash rate to 0%. 2.1.3 Gold Holdings during December Germany’s gold holding slightly declined for the first time this year: During December 2013, its hoards decreased by 3.5 tons. There weren't any other substantial changes in gold holding among other top gold hording countries. The total global gold supply reached 31,913.50 tons – a 14.9 tons drop. Further, by the end of December, gold holding in the commercial gold trust SPDF declined again by 5% compared with its gold holding at the end of November. The current gold holding is set at 801 tons. This is the lowest level in the past several years. If this ETF’s gold hoards further fall, it could signal the demand for gold as an investment continues to soften. Keep in mind, however, the changes in this ETF is only a signal for the developments in the demand for gold as investment and doesn’t represent the entire demand for gold as investment. A note: the linear correlation between the shifts 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 decline, the holding in the SPDF is likely to follow. 2.1.4 Gold & Silver Prices and U.S Dollar Here below are the correlations among major currencies and precious metals prices (up to December 31st): 4 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  8. 8. The strongest correlations (in absolute terms) with gold price were the following exchange rates (in brackets are the linear correlation): USD/CAD (0.15), and Euro/USD (0.13); the strongest correlations with silver price were USD/CAD (0.18), AUD/USD (-0.15), and Euro/USD (0.11). The correlations of precious metals with some of these exchange rates further weakened compared to the previous months especially the "risky currencies" such as Euro and Aussie dollar. Thus, these correlations suggest the daily changes in gold and silver prices were very little related to the shifts in the above-mentioned currencies pairs. The Indian Rupee slightly appreciated against the USD. This may have partly affected the demand for gold and silver; India is second leading country in importing gold. Nonetheless, India’s government decision to increase the tax import on gold has reduced the demand for gold. But if the Rupee further appreciates, this might indirectly and positively affect precious metals prices. 2.1.5 US Treasuries / Gold & Silver Prices – December The US 10-year Treasury yields rose again throughout the month. By the end of the month, the 10-year yield increased by 0.24 percentage points. The chart below shows the daily changes of gold price and 10 year daily Treasury bills yields during December (up to December 31st). During December, gold and 10-yr yields have had a strong negative correlation with gold and silver. 5 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  9. 9. In the chart below are the linear correlations between the daily changes of long term U.S treasury bills yields and daily percent shifts of precious metals prices. The strongest correlations between yields and gold were in the mid-long term bonds (10 years). For the 10 year bonds the correlations between the yields and precious metals prices were negative and strong. The decision of the FOMC to taper QE3 may further contribute to the decline in demand for investments such as U.S LT and precious metals. 2.1.6 Gold & Silver Prices and Other Indexes Let's examine the relation of gold and silver prices with the major indexes including S&P500 and oil prices during December: During the month, the S&P500 index rallied during the month so that it has outperformed silver and gold. If the S&P500 continues to recover, this may turn investor towards equities and out of gold and silver. During December, the price of oil (WTI) rose by 6.2% while Brent oil slightly rose by 1%. The linear correlation between oil and gold was positive and very weak. This means that while crude oil price (WTI) and bullion prices had similar downward trend, their daily percent changes weren’t correlated. 3.1 Outlook for Gold and Silver – January 2014 Let’s examine several reports, and events that could affect the precious metals markets: Based on the December report, the U.S employment increased by 203k jobs; this report tends to be negatively correlated with gold and silver prices via the U.S dollar. 6 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  10. 10. The table above shows the dates of the announcements of the U.S. labor report, the change in employment (column A), and the daily percent changes for gold and silver prices on the day the labor report came out (column B and C, respectively). The correlations among the shifts in precious metals and U.S. employment are mid-strong and negative. In the previous report the expectations were for 130k growth in employment. These correlations aren't significant, and may vary over time. The expectations for the growth in labor tend to also play a role in affecting gold and silver prices. If the next labor report (to be published on January 10 th) will show growth of over 160k jobs – and above expectations – this may further pull down gold and silver prices. The ECB will decide on its cash rate during the second week of January; in the last ECB meeting the cash rate was flat at 0.25%. The current expectations are that ECB will maintain its cash rate flat. The FOMC decided to taper QE3 starting January by $10 billion so that the current asset purchase program will decline to $75 billion a month of long term securities and mortgage backed securities. At the same time, FOMC chairman, Ben Bernanke, in his last press conference at this capacity, emphasized that the Fed is likely to maintain its current interest rate at its low level until the end of 2015. Therefore, the mini-taper might have little short-term effect on the prices of gold and silver as the Fed is maintaining its low rate, which seem to have had a strong long term positive effect on precious metals. Let’s see why. 7 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  11. 11. In the table below are the recent FOMC meetings and the shifts in the prices of gold and silver. In the past two decisions gold and silver tumbled down the next day. 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 continues to augment the U.S money base as seen in the chart below. But the chart above also presents the detachment of gold price’s trend from the growth of the U.S money base in year. The linear correlation between these data sets (monthly changes, money base lagged by two months) weakened to reach only 0.13. The sharp rise in U.S money base doesn’t seem to positively affect gold price as it may have done in the past. Perhaps the fear of inflation has diminished in the past year. This also suggests that the mini-taper might not have a strong adverse effect on the prices of gold and silver, because QE3 had little positive effect to begin with on precious metals prices. Looking forward, the minutes of the last meeting will be released on January 8 th and the next meeting, this time under Yellen, will be held during January 28-29. If another tapering will be announced, it could have some short-term adverse effects on precious metals. The U.S budget was closed in a deal before the end of the year, but the uncertainty around raising the debt ceiling remains. Coming February when the debt ceiling will need to be raised, safe haven investments such as gold and silver could benefit from the debt ceiling debate; as they did in the past. If U.S. long term Treasury bills yields continues to increase, as they did in recent months, they could indicate that traders are taking more risk; thus, more investors are 8 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  12. 12. exiting bonds market and are getting into riskier investments – this sentiment doesn’t help the bullion market. The recovery in the U.S equity markets may have pushed investors away from bullion. If stock markets continue to rally, this may pull down precious metals prices. The recent appreciation of the Rupee against the USD during the month might have positively affected the demand for gold. Nonetheless, the India’s government intervention by jacking up the import tax has softened the demand for gold. The correlations among precious metals prices and leading currencies have weakened in recent months. Thus, if major currencies continue to depreciate against the USD, they might have a moderate adverse effect on bullion prices. The upcoming minutes of the last FOMC meeting and the first FOMC meeting of the year could have some short-term effects on the bullion market; especially if the FOMC decides to further cut down its QE3 program. The recent mini-taper had some adverse effect on precious metals prices. Moreover, the positive news on the progress of the U.S economy in employment, GDP, housing and manufacturing may have also had a negative effect on gold and silver and a positive one on the U.S equity markets. If equity markets continue to pull up, this could suggest more investors are pulling out of bullion and into equities. The upcoming U.S data on labor, manufacturing, and services markets will offer insight behind the progress of the U.S economy. If the upcoming reports show positive signs of progress, they might drag further down bullion prices. The ongoing drop in GLD’s gold holdings signals the demand for gold as an investment is softening. Finally, if the demand for precious metals in India continues to diminish, this could adversely affect the precious metals market. In conclusion, I think gold and silver might start off the month on a positive note to correct the sharp drop in prices at the end of the month, but soon after may resume their slow descent. Appendix Here are additional reports that might shortly affect precious metals prices: Housing Starts– In the December report, housing starts stats spiked by 22.7%; they suppose to be negatively correlated with gold price (lagged by one day); if in the next report, housing starts continue to rise, it may drag down gold price (the next report will be published on January 17th); Consumer Price Index – the U.S CPI remained flat in November; the U.S. CPI is suppose to be positively correlated with silver; thus, if the U.S. inflation picks up in the upcoming January report, this might pressure up silver price (the next report will be published on January 16th); U.S Manufacturing PMI Survey – the Manufacturing PMI slightly rose again to 57.3%, according to the recent December report referring to November – this means the manufacturing sectors in the U.S are growing at a faster rate; if this trend continues, it could suggest the U.S economy is further growing, which could adversely affect gold and silver (the next report will be released on January 2nd). 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. 9 __________________________________________________________________________________________________ © All rights reserved – Trading NRG

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