Trading NRG - Gold and silver outlook report - december 2013


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Trading NRG - Gold and silver outlook report - december 2013

  1. 1. November Analysis December Outlook 2013 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 November and some perspective as to what is up ahead in December 2013. I appreciate your feedback, so if you have any comments or suggestions don't hesitate to contact me. Thanks, Lior Cohen Tel Aviv. 2nd of December 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. 2 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  3. 3. Table of Content 1.1 Preface……………………….……………………..……..…….…...….......Page 1 2.1 Gold and Silver Prices November 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 November………..………..................................Page 3 2.1.4 Gold & Silver Prices and US Dollar ….………..…........................Page 4 2.1.5 US Treasuries / Gold & Silver Prices – November ….…...............Page 5 2.1.6 Gold & Silver Prices and Other Indexes ……….…..…….…….....Page 6 3.1 Outlook for Gold and Silver Prices – December ………….……...….……..Page 6 Appendix …………………………..………………….…….……..…................Page 9 3 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  4. 4. 1.1 Preface Gold and Silver Prices Outlook for December 2013 Precious metals prices resumed their downward trend during November. The minutes of the penultimate FOMC meeting of the year revealed its members discussed the importance of conveying to the public that tapering QE3 (if and when it starts) won’t imply the Fed will also consider reducing its cash rate in the near future. In any case, some analysts think the FOMC has left the door open on tapering QE3 in December – the last meeting of the year. Looking forward, will gold and silver bounce back this month? Let's breakdown the upcoming events, decisions and reports that may affect precious metals; let’s start, however, with a short analysis of November. 2.1 Gold and Silver Prices November 2013 Gold and silver prices sharply fell mostly during the last few weeks of November. Their tumble coincided with the sharp depreciation of the Aussie dollar and Japanese yen against the USD. By the end of November, the price of gold decreased by 5.52%. The price of silver plummeted by 8.4%. Let's divide November into two parts: the table below divides the month at November 6th. I divide the month to demonstrate the shift in pace of gold and silver prices; during the first part of November, gold slipped by 0.4%; silver, by 0.4%. During the second part of November, however, gold plummeted by 5.1%; silver price, by 8%. During the first part of November, the U.S dollar appreciated against the Euro and Japanese yen but slipped against the Aussie dollar and Canadian dollar; the Euro/USD and USD/Yen currency pairs are usually strongly linked with gold and silver. During the second part of the month, the Aussie dollar and Japanese yen sharply depreciated against the US dollar. The chart below presents the shifts of gold and silver during November, in which the prices are normalized to 100 on October 31st 2013. Page 1 _________________________________________________________________________________________________ © All rights reserved – Trading NRG
  5. 5. The ratio of gold to silver (gold price/silver price) slightly rose during the month. The ratio increased as silver price has under-performed gold price. During the month the ratio ranged between 60 and 62. Here are several factors that may have adversely affected gold and silver prices during the month: 1. The renewed speculations around the FOMC tapering QE3 in December; 2. Based on the recent U.S non-farm payroll report, 204k jobs were added – this was higher than estimated and may have adversely affected gold and silver prices; 3. The depreciation of several currencies such as Japanese yen and Aussie dollar against the USD during the second part of November may have pulled down gold and silver prices; 4. The decision of ECB to cut down its cash rate by 0.25pp to 0.25%; 5. The drop in U.S jobless claims during November; 6. The depreciation of the Indian Rupee may have dragged the demand for gold in India, among the leading importers of gold; 7. Several U.S reports were positive: Retail sales slightly rose by 0.4% during November; manufacturing PMI rose to 57.3% during November. These reports suggest the U.S economy is progressing and thus may have pulled down precious metals; 8. The low rise in India’s precious metals demand during Festival season; 9. 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 November: 1. The slight appreciation of the Euro against the USD during the second part of November may have curbed down the fall of gold and silver prices; 2. The decision of the FOMC to keep its policy unchanged and not taper QE3; 3. The decision of BOE, BOC, and RBA to keep their respective cash rate unchanged in November; 2 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  6. 6. 4. Several U.S reports showed little progress: Philly Fed index slipped during November; U.S consumer confidence index declined; 5. The pledge of the FOMC to keep its low rates until mid 2015; The correlation between gold and silver prices further weakened during November compared to October. The correlation reached during November 0.783. If the correlation remains strong, it could suggest the effect gold has on silver will remain robust. The standard deviations of gold and silver prices also fell during November compared with their standard deviations in October. This means, the volatility of gold and silver prices contracted in November. 2.1.1 FOMC Meeting – Update In the previous FOMC meeting the FOMC decided to maintain its $85 billion a month asset purchase program. Further, the minutes of the last FOMC meeting were released at the end of the month: Members of the FOMC discussed the importance of conveying to the public that slowly tapering QE3 (if any when it commences) isn’t linked with the FOMC’s future guidance regarding the progress of the U.S economy and its cash rate decision. The cash rate is likely to remain at its lowest level until the unemployment rate falls below 6-6.5% and the two-year inflation projects remain up to 2.5% annual rate and the and longer-term inflation expectations continue to be well anchored. Nonetheless, some analysts still suspect the Fed may taper QE3 in the 3 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  7. 7. December. I remain skeptical. The upcoming FOMC meeting will take place between December 17th and 18th. 2.1.2 Europe’s Economy – Update The EU economy continues to show little signs of growth. The ECB has decided to reduce its interest rate by 0.25 percentage point to its lowest level in history. This decision may positively affect the EU economy. This news, however, had little effect on the Euro as it remained flat during November. 2.1.3 Gold Holdings during November Russia's gold holding changed direction and slipped for the first time since November 2012: During November 2013, its hoards decreased by 0.4 tons. There weren't any other substantial changes in gold holding among other top gold hording countries. The total global gold supply reached 31,898.60 tons – a 22 tons drop. Further, by the end of November, the gold holding in the commercial gold trust SPDF declined again by 3.3% compared with its gold holding at the end of October. The current gold holding is set at 843 tons. This is the lowest level in recent years. If this ETF’s gold hoards further fall, it could signal the demand for gold as an investment continues to diminish. Keep in mind, however, the shifts in this ETF is only a signal for the changes 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 changes in the SPDF holding during the month and the price of gold is, as expected, strong and positive at 0.56. Thus, if gold price continues to fall, 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 November 29th): 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): Euro/USD (0.48), and AUD/USD (0.43); the strongest correlations with silver price were Euro/USD (0.34), USD/YEN (0.32), and USD/CAD (0.14). The correlations of precious metals with some of these exchange rates weakened compared to the previous months especially the "risky currencies" such as Euro and Aussie dollar. Thus, these correlations suggest the daily shifts in gold and silver prices were less related to the changes in the above-mentioned currencies pairs. The Indian Rupee slightly appreciated against the USD. This change may have partly affected the demand for gold and silver; India is among the leading countries in importing gold. Nonetheless, India’s government decision to augment the tax import on gold has reduced the demand for gold. But if the Rupee further appreciates, this might indirectly and positively affect bullion prices. 2.1.5 US Treasuries / Gold & Silver Prices – November The US 10-year Treasury yields changed direction and increased throughout the month. By the end of the month, the 10-year yield increased by 0.18 percentage points. The chart below presents the daily changes of gold price and 10 year daily Treasury bills yields during November (up to November 29 th). During November, gold and 10-yr yields have had a mid-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. If the FOMC starts tapering QE3 in December, this may contribute to the fall 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 relation of gold and silver prices with the major indexes including S&P500 and oil prices during November: During the month, the S&P500 index has out-performed silver and gold. If the S&P500 continues to rally, this may turn investor towards equities and out of precious metals. During November, the price of oil (WTI) also fell by 3.8% while Brent oil slightly rose by 0.78%. The linear correlation between oil and gold was negative and very weak. This means that while crude oil price (WTI) and precious metals prices had similar downward trend, their daily percent changes weren’t correlated. 3.1 Outlook for Gold and Silver – December 2013 Let’s examine several reports, and events that could affect the precious metals markets: Based on the November report, the U.S employment sharply rose by 204k 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 December 6 th) will show growth of over 160k jobs – and above expectations – this may further drag down gold and silver prices. The ECB will decide on its cash rate during the first week of December; in the last ECB meeting the cash rate was lowered to 0.25%. The current expectations are that ECB will keep its cash rate unchanged. ECB President Mario Draghi may refer to the weak Euro; he may also hint of potential plans to introduce a new LTRO for banks that agree to use it for lending businesses. In such an event, this may drag down the Euro against the USD. If the Euro falls, this may adversely affect precious metals prices. Following the recent FOMC meeting, and the minutes of the last meeting, the expectations are high as to whether the Fed will announce of any change to its policy in the next meeting, which will be held during December 17-18. 7 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  11. 11. The chart above shows Google’s trends for the phrase “fed taper” in the past three months. As you can see, this phrase didn’t trend much in the past couple of months. So it seems that no news has rekindled the speculations around the Fed’s future policy. Some analysts still think the FOMC will surprise and announce of tapering QE3 in the December. I remain skeptic. Some analysts also voiced their guess that the Fed is considering raising the cash rate, which will further pull down bullion rates. I think this notion is also premature and isn’t founded. Nonetheless, if the U.S economy continues to show signs of improved mainly in the labor market, the Fed may start tapering QE3 in the near future perhaps around March/April 2014. The upcoming FOMC meeting will be the last with Bernanke as Chairman. Yellen will lead the Fed at the start of 2014. It’s likely that she will announce the tapering of QE3. In the table below are the recent FOMC meetings and the changes in the prices of gold and silver. The recent decision resulted in gold and silver plummeting 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. 8 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  12. 12. But the chart above also shows the detachment of gold price’s trend from the growth of the U.S money base in the past several months. 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 finding implies that even if the Fed continues to purchase long term securities, it will have little positive effect on gold and silver prices. But if the Fed tapers QE3, it could drag down gold and silver prices. The uncertainty around the U.S budget and raising the debt ceiling is also a factor that could benefit safe haven investments such as gold and silver. These factors are likely to raise the uncertainty in the markets during the first months of 2014. If U.S. long term Treasury bills yields continues to rise, as they did last month, they could indicate that traders are taking more risk; thus, more investors are exiting bonds market and are getting into riskier investments. The recovery in the U.S equity markets may have pushed investors away from precious metals. 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 last month. Thus, if major currencies continue to depreciate against the USD, they might have a moderate adverse effect on precious meals prices. The upcoming FOMC meeting is likely to among the main turning points for gold and silver. If the Fed doesn’t change its policy, or if the Fed hints of the date at which it plans to start tapering QE3, this could reduce the prices of gold and silver. Conversely, if the Fed reiterates its stand of keeping the cash rate at its currently low level next year, then this could curb some of the potential drop in prices. My guess, the FOMC won’t taper its asset purchase program in December. In the meantime, the upcoming U.S data on labor, manufacturing, and services markets will offer insight 9 __________________________________________________________________________________________________ © All rights reserved – Trading NRG
  13. 13. behind the progress of the U.S economy. If the upcoming reports show positive signs of growth, they might pressure down precious metals prices. Further, if U.S equities continue to rally, they are likely to weaken the demand for gold and silver as alternative investments. In Europe, if Euro resumes its downward trend, it may also slightly and negatively affect gold and silver prices. The drop in demand for GLD ETF signals the demand for gold as an investment may be softening. Finally, if the demand for precious metals in India continues to fall, this could adversely affect the bullion market. In conclusion, I think gold and silver might resume their downward trend and slowly fall as they did in the past several months. Appendix Here are additional reports that might shortly affect precious metals prices: Housing Starts– In the November report, housing starts stats weren’t released; they suppose to be negatively correlated with gold price (lagged by one day); if in the next report, housing starts pick up, it may pull down gold price (the next report will be published on December 18th); Consumer Price Index – the U.S CPI edged up again in October by 0.1%; the U.S. CPI is suppose to be positively correlated with silver; thus, if the U.S. inflation continues to increase in the upcoming December report, this might pressure up silver price (the next report will be published on December 17th); U.S Manufacturing PMI Survey – the Manufacturing PMI slightly rose again to 56.4%, according to the recent December report referring to November – this means the manufacturing sectors in the U.S are growing at a faster pace; 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 December 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. 10 __________________________________________________________________________________________________ © All rights reserved – Trading NRG