Trading Nrg - Gold and silver Outlook report - November 2013

October Analysis November Outlook

2013

By

Lior Cohen

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Introduction Dear Reader,

Thank you for downloading the latest gold and silver market research report. I hopethis report will be interesting for you to read, and provide you with some insight ofthe recent developments in the gold and silver markets during October and someperspective as to what is up ahead in November 2013. I appreciate your feedback, soif you have any comments or suggestions don't hesitate to contact me. [email protected]

Thanks, Lior Cohen Tel Aviv. 2nd of November 2013Disclaimer Trading commodities, forex, stocks, options, ETFS etc. (trading) carries a high level of risk and maynot be suitable for all investors. The risk grows as the leverage is higher. Investment objectives, riskappetite and the trader' level of experience should be carefully weighed before entering the tradingmarket. There is always a possibility of losing some or all of your initial investment or deposit, so youshould not invest money which you can't afford to lose. The high risk that is involved with trading mustbe known to you. Please ask for advice from an independent financial advisor before entering thismarket. This report is not and should not be construed as an offer to sell or the solicitation of an offer topurchase or subscribe for any investment. Trading NRG and the authors of this report have based thisdocument on information obtained from sources it believes to be reliable but which it has notindependently 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 claimor 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 andpermitted re-published content should be taken as general market commentary. This is by no meansinvestment advice. Neither Trading NRG nor any of its permitted authors, nor its providers ofinformation, 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 thathave received permission to republish the content originating on Trading NRG and its reports, or forany errors or omissions therein, nor will Trading NRG or any of its permitted authors or any of itsproviders of information have any liability for the use, interpretation or implementation of theinformation or models contained herein by any person. Trading NRG and any of its permitted authorswill not accept liability for any damage, loss, including without limitation to, any profit loss, whichmay either arise directly or indirectly from use of such information.

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Table of Content

1.1 Preface……………………….……………………..……..…….…..….......Page 1 2.1 Gold and Silver Prices October 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 October………..……….....................................Page 3 2.1.4 Gold & Silver Prices and US Dollar ….………..….......................Page 4 2.1.5 US Treasuries / Gold & Silver Prices – October ….…...................Page 5 2.1.6 Gold & Silver Prices and Other Indexes ……….…..………….....Page 5

3.1 Outlook for Gold and Silver Prices – November ………….……...………..Page 6 Appendix …………………………..………………….…….……..…...............Page 9

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1.1 Preface Gold and Silver Prices Outlook for November 2013 The precious metals market hasn’t moved much and gold and silver pricesremained nearly unchanged on a monthly scale. The FOMC meeting ended with nochange in policy. But some analysts think the FOMC has left the door open ontapering QE3 in December. The upcoming minutes of the FOMC meeting couldoffer some clarifications regarding tapering QE3. Looking forward, will gold andsilver resume their upward trend in November? Let's breakdown the forthcomingevents, decisions and publications that may affect the bullion market, which willunfold during November; let’s also provide a short analysis for October.

2.1 Gold and Silver Prices October 2013

Gold and silver prices moderately moved during October. Their little movementcoincided with the developments of the Euro and Japanese yen against the USD. Bythe end of October, the price of gold decreased by 0.24%. The price of silver rose by0.68%. Let's divide October into two parts: the table below divides the month at October 15th.I divide the month to demonstrate the shift in pace of gold and silver prices; duringthe first part of October, gold fell by 4.1%; silver, by 2.4%. During the second part ofOctober, however, gold rose by 4%; silver price, by 3.2%.

During the first part of October, the U.S dollar depreciated against the Euro, Japaneseyen and Aussie dollar; the Euro/USD and USD/Yen currency pairs are usuallystrongly correlated with gold and silver. During the second part of the month, theAussie dollar and Japanese yen slightly depreciated against the US dollar. The chart below shows the changes of gold and silver during October, in which theprices are normalized to 100 on September 30th 2013.

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The ratio of gold to silver (gold price/silver price) slightly fell during the month. Theratio decreased as silver price has out-performed gold price. During the month theratio ranged between 59 and 61.

Here are several factors that may have adversely affected gold and silver prices duringthe month:

1. The rekindled speculations around the FOMC tapering QE3 in December; 2. The depreciation of several currencies such as Canadian dollar and Aussie

dollar against the USD during the second part of October may have curbed therally of gold and silver prices;

3. The ongoing decline in U.S jobless claims during October; 4. The depreciation of the Indian Rupee may have dragged the demand for gold

in India, among the leading importers of gold; 5. The potential drop in India’s gold imports; 6. The recovery 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 duringOctober:

1. Several U.S reports showed little progress: Manufacturing PMI slightlyincreased again to 56.4; retail sales inched down by 0.1% during October;Philly Fed index slipped during October. These reports suggest the U.Seconomy isn’t progressing any faster and thus may have pulled up preciousmetals;

2. The decision of the FOMC to leave its policy unchanged and not to taper QE3at this point;

3. The appreciation of several currencies such as Euro and Aussie dollar againstthe USD during the first part of October may have curbed down the decline ofgold and silver prices;

4. The decision of BOE, BOC, RBA and ECB to keep their respective cash rateunchanged in October;

5. According to the recent U.S non-farm payroll report, only 148k jobs wereadded – this was lower than estimated any may have positively affected goldand silver prices;

6. The pledge of the FOMC to keep its low rates until mid 2015;

The correlation between gold and silver prices slightly weakened during Octobercompared to September. The correlation reached during October 0.877. If thecorrelation remains robust, it could suggest the effect gold has on silver will remainstrong.

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The standard deviations of gold and silver prices during October also fell comparedwith their standard deviations in September. This means, the volatility of gold andsilver prices contracted in October.

2.1.1 FOMC Meeting – Update In the last FOMC meeting the FOMC decided to leave its policy unchanged includingmaintaining its $85 billion a month asset purchase program. Nonetheless, someanalysts suspect the Fed may taper QE3 in the December. Considering the littleprogress in the U.S economy and slow improvement in the labor market I remainskeptical. The upcoming minutes of the last FOMC meeting will be publish onNovember 20th. The minutes will reveal the thought process behind the recent FOMCdecision.

2.1.2 Europe’s Economy – UpdateThe EU economy continues to show little signs of progress. The ECB may eventuallydecide to reduce its interest rate by another 0.25 percentage point, which couldweaken the Euro. But if ECB keeps its rate unchanged again, this could continue topull up the Euro against the USD.

2.1.3 Gold Holdings during October Russia's gold holding increased again: During October, its hoards increased by 12.7tons. There weren't any other substantial changes in gold holding among other topgold hording countries. The total global gold supply reached 31,920.60 tons – a 9.1tons drop.

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Moreover, by the end of October, the gold holding in the commercial gold trust SPDFfell again by 4.38% compared with its gold holding at the end of September. Thecurrent gold holding is set at 866 tons. This is the lowest level in years. If this ETF’sgold hoards further decline, it could signal the demand for gold as an investmentcontinues to drop. Keep in mind, however, the changes in this ETF is only a signal forthe changes in the demand for gold as investment and doesn’t represent the entiredemand for gold as investment. A note: the linear correlation between the shifts in theSPDF holding during the month and the price of gold is, as expected, strong andpositive at 0.56. Thus, if gold price continues to decline, the holding in the SPDF islikely 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 October 31st):

The strongest correlations (in absolute terms) with gold price were the followingexchange rates (in brackets are the linear correlation): Euro/USD (0.61), USD/YEN (-0.37), and AUD/USD (0.06); the strongest correlations with silver price wereEuro/USD (0.60), USD/YEN (-0.24), and USD/CAD (0.15).

The correlations of precious metals with some of these exchange rates sharplystrengthened compared to the previous months especially the "risky currencies" suchas Euro. Thus, these correlations suggest the daily changes in gold and silver priceswere more related to the shifts in the above-mentioned currencies pairs.

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Keep in mind the depreciation of the Indian Rupee against the USD might have alsoaffected the demand for gold and silver; India is among the leading countries inimporting gold; if the Rupee further depreciates, this might indirectly and adverselyaffect bullion prices.

2.1.5 US Treasuries / Gold & Silver Prices – October The US 10-year Treasury yields declined again mainly during the second part of themonth – also after the FOMC meeting. By the end of the month, the 10-year yielddecreased by 0.09 percentage points. The chart below shows the daily shifts of goldprice and 10 year daily Treasury bills yields during October (up to October 30th).During October gold and 10-yr yields have had a weak negative correlation with goldand silver.

In the chart below are the linear correlations between the daily shifts of long term U.Streasury bills yields and daily percent changes of precious metals prices. The strongestcorrelations between yields and gold were in the long term bonds (30 years).

For the 10 year bonds the correlations between the yields and precious metals priceswere negative and strong.

If the FOMC hints in the minutes of tapering of QE3, this may contribute to the dropin 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 includingS&P500 and oil prices during October: During the month the S&P500 index has sharply out-performed silver and gold. If theS&P500 continues to recover, this may turn investor towards equities and out ofprecious metals.

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During October, the price of oil (WTI) also fell by 7.54% and Brent oil by 2.27%.Nonetheless, the linear correlation between oil and gold was positive but very weak.This means that while crude oil price and precious metals prices has similardownward trend, their daily percent changes weren’t linked.

3.1 Outlook for Gold and Silver – November 2013Let’s examine several reports, and events that could affect the precious metalsmarkets: Based on the October report, the U.S employment rose by 148k jobs; this report tendsto 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, thechange in employment (column A), and the daily percent changes for gold and silverprices on the day the labor report came out (column B and C, respectively). Thecorrelations among the changes in precious metals and U.S. employment are mid-strong and negative. In the previous report the expectations were for 166k growth inemployment.

These correlations aren't significant, and may vary over time. The expectations for thegrowth in labor tend to also play a role in affecting the direction of gold and silverprice. If the next labor report (to be published on November 8th) will show growth ofclose of below 160k jobs –and below expectations – this may positively affect goldand silver prices. The recent government shutdown is likely to reflect in the upcominglabor report and could result in a very low number of jobs added that might even be areduction in jobs.

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The ECB will announce of any changes to its cash rate during the first week ofNovember; in the previous ECB meeting the rate remained flat at 0.50%. MarioDraghi reiterated his pledge to keep rates unchanged in the near future. The currentexpectations are that ECB won’t change its interest rate but might hint of doing so inthe near future. In such an event, this may drag down the Euro against the USD. If theEuro changes direction and falls, this may adversely affect precious metals prices.

Following the recent FOMC meeting, which was held on October 29-30, the FOMCdidn’t change its policy. Some investors and analysts suspect, however, the Fed hintedof opening the door for tapering QE3 in December. Nonetheless, if the U.S economyshows little signs of progress and the labor market remains weak, the Fed may nottaper QE3 anytime soon. The upcoming minutes of the last FOMC meeting will bepublish on November 20th. The minutes will reveal any insight behind the recentdecision. Considering the current available data, it seems unlikely the Fed will taperQE3 next month. Moreover, the December meeting will be Bernanke’s last meeting asChairman so that making this crucial decision on the way out doesn’t seem a goodidea.

In the table below are the recent FOMC meetings and the changes in the prices ofgold and silver. The recent decision resulted in gold and silver plummeting the nextday.

The Federal Reserve's QE3 program to purchase long term securities at a monthly rateof $85 billion, and its pledge to maintain its short term interest rates low until mid2015 continues to augment the U.S money base as seen in the chart below.

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Nonetheless, the chart above also presents the ongoing detachment of gold from theprogress 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 positively affect gold price asit may have done previously. Perhaps the fear of inflation has diminished during2012-2013. This finding suggests that even if the Fed continues to purchase long termsecurities, it will have little positive effect on gold and silver prices. But if the Fedtapers QE3, it could pull down gold and silver prices.

The uncertainty around the U.S budget and raising the debt ceiling is also a factor thatcould benefit safe haven investments such as gold and silver. These factors are likelyto raise the uncertainty in the markets during the first months of 2014.

If U.S. long term Treasury bills yields further fall, as they did last month, they couldindicate that traders are taking less risk; thus, more investors are entering bondsmarket and are getting out of riskier investments.

The recovery in the U.S equity markets may have pushed investors away fromprecious metals. If stock markets continue to rise, this may pull down precious metalsprices.

The depreciation of the Rupee against the USD during the month might haveadversely affected the demand for gold. On the other hand, the start of weddingseason in India is likely to pull up gold demand.

The correlations among precious metals prices and leading currencies havestrengthened last month. Thus, if major currencies continue to depreciate against theUSD, they might adversely affect precious meals prices.

The FOMC minutes at the end of the month may affect the financial markets: If theminutes reveal that more FOMC members are reconsidering tapering QE3 or hintingto that effect by the end of 2013, this could result in gold and silver further declining.My guess, however, the FOMC won’t taper its asset purchase program in 2013. Insuch a case, precious metals might bounce back from the recent fall at the end ofOctober. In the meantime, the upcoming U.S data on manufacturing, services and

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labor markets will offer insight behind the progress of the U.S economy. If theupcoming reports show little signs of growth, they might persuade FOMC members tokeep QE3 at its current pace in the near future, which will slightly pressure upprecious metals prices. Conversely, if U.S equities continue to recover, it is likely toweaken the demand for gold and silver as alternative investments. In Europe, if Eurocontinues to rally, it may also slightly and positively affect gold and silver prices. Thedecline in demand for GLD ETF signals the demand for gold as an investment may befalling. Finally, if the demand for precious metals in China and India rally, this couldpositively affect the bullion market. In conclusion, I remain neutral regarding the progress of gold and silver prices. Goldand silver are likely to move in an unclear trend as they did during last month.Nevertheless, if U.S economy shows little signs of progress, if the USD resumes itsrally and if the Asian market strengthens, precious metals may slightly recover fromtheir fall from the end of October.

AppendixHere are additional reports that might shortly affect precious metals prices:

Housing Starts– In the September report, housing starts rose by 0.9% and is supposeto be negatively correlated with gold price (lagged by one day); if in the next report,housing starts continues to rise, it may pull down gold price (the next report will bepublished on November 17th);Consumer Price Index – the U.S CPI inched up again in September by 0.2%; the U.S.CPI is suppose to be positively correlated with silver; thus, if the U.S. inflationcontinues to rise in the upcoming November report, this might pressure up silver price(the next report will be published on November 20th); U.S Manufacturing PMI Survey – the Manufacturing PMI slightly increased again to56.4%, according to the recent November report referring to October – this means themanufacturing 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 affectgold and silver (the next report will be published on December 2nd). In any case, these reports have had moderate and short term effect (at best) on thepath of gold and silver in the past; thus, these reports might continue slightly affectgold and silver rates in the short term.

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