Guest Commentary: Gold & Silver Outlook for February 2012

During January, gold demonstrated its strongest performance in a single month since August 2011; for silver it was since July 2011.

During January, gold demonstrated its strongest performance in a single month since August 2011; for silver it was since July 2011. Gold price is currently 10.76% above its price from the end of 2011; silver has added 21.05% to its value. What were the driving forces for this rally in gold and silver during January? Part of it might have to do with the recent pledge of the FOMC to keep rates low until late 2014 and the "January effect" that trade up the American stock markets. Will this rally continue in February 2012? Let's analyze the metals market for January and provide a short outlook for gold and silver for February 2012.

Gold and Silver January 2012

Gold ended January (as of January 29th) with a 10.7% gain and silver rose by 21.05%.

Let's divide January into two parts: the table below divides the month to two with the breaking point at January 13th; during the first part of January, gold rose by 4.1% and silver by 5.8%. During the second part, silver rose by 14.5% and gold by 6.4%.

During the first part of January, the USD slightly appreciated against the Euro and CAD, but traded down against the AUD; the last two currencies are usually strongly correlated with gold and silver; during the second part of January, the USD sharply depreciated against the Euro, AUD and CAD; this shift might partly explain the sharp increase of gold and silver during the second part of the month.

The chart below presents the changes of gold and silver during January, in which the prices are normalized to 100 on December 30th 2011.

The next chart presents the development of the ratio of gold to silver during January; the ratio had a downward direction during most of the month especially during the last couple of weeks. The ratio fell as silver has outperformed gold.

Here are several factors that may have contributed to gold and silver to augment during January:

1. The FOMC pledge to keep rates low until late 2014 (see below for more on this issue);
2. The U.S. federal deficit expanded by 85 billion during December 2011; this expansion raised the uncertainty level in the market;
3. The appreciation of the Australian dollar, and Euro against the U.S. dollar during most of January mainly during the last weeks of the month;
4. The decline in the U.S. housing market (including the drop in housing starts);

Outlook for February 2012

Here are several factors to consider that may influence the direction of gold and silver:

The ECB will decide during the second week of February its rate; in January the ECB President kept the rates at 1.00%. If the ECB will lower the rate, this may curb the recent rally of gold and silver prices.

In the January report, the U.S labor added 200k jobs to the labor force. This report has had a negative correlation with gold and silver via the USD.

CME margins: the CME raised margins on gold contracts three times in recent months the last time was back in September 2011. The volatility of gold and silver is contained, but they were traded sharply up in recent weeks. This might prompt CME to raise the margin which will eventually drive gold and silver down.

For the complete report on gold and silver prices see here in Trading NRG

By: Lior Cohen, M.A. in Economics, Commodities Analyst and Blogger at Trading NRG

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