Gold and silver changed direction very sharply throughout 2011: despite the sharp gains of gold and silver prices up until September, precious metals prices changed direction during the last quarter of the year and plummeted in a very short period of time; from this drop precious metals didn't recover throughout the remainder of the year. Silver declined below its initial price level from the beginning of the year, while gold ended the year only 12% above its price level from January 3rd 2011. Can we learn from the developments in the bullion market during 2011 to predict what will be the direction of gold and silver prices in 2012? Let's examine up close the development of precious metals in 2011 and offer a broad prediction for gold and silver in 2012.
Gold and Silver in 2011
During the first few month of the year, silver sharply outperformed gold and by the end of April silver rose by nearly 56%, while gold by only 9% from the beginning of the year. Once the price of silver sharply rose, CME raised the margins on silver; this action had an immediate response in the market and by May 17th silver declined to 7% above the initial price level. The next rally came from May to the beginning of September for both gold and silver. This rally came when the uncertainty in the markets rose especially around the speculation around the stability of the U.S. economy. This included the debate around raising the debt ceiling. This rally came to a halt in September, not only because the CME intervened and raise margins on gold and silver, but also because the FOMC decided to purchase $400 billion worth long term securities in lieu of another Quantitative Easing Plan. Since many had anticipated the Fed to come up with another stimulus plan, once there was only a plan to purchase LT securities without expanding the monetary base, the decline of precious metal prices soon followed.
The chart below shows the development of gold and silver during 2011, in which gold and silver are normalized to 100 for January 3rd, 2011.
The next chart shows the development of the ratio of gold to silver (gold /silver) during 2011; the ratio had a downward trend during the first few months of the year as silver outperformed gold, but towards the next several months the ratio had an upward trend as silver underperformed gold.
Here are five factors that may have affected gold and silver to trade down in 2011:
- The FOMC's decision not to add another stimulus plan (quantitative easing 3) during the second part of 2011;
- CME's decisions to raise the margins on silver and gold;
- The European Debt Crisis that affected gold price especially during the second part of the year, via the liquidity problem that many EU banks and traders faced;
- The strengthening of the U.S dollar against other currencies (see below);
- The shift in market sentiment from considering gold a safe haven to a risky asset;
On the other hand, I consider there were three factors that pushed up gold and silver prices mainly during the first three quarters of 2011:
- The FOMC's decision to issue QE2 by the end of 2010; this action raised the monetary base and consequently positively affected gold and silver prices mainly during the first few months of the year;
- The speculation around the instability of the U.S. economy;
- The anticipation of the Fed issuing another stimulus plan (QE3).
Outlook for Gold and Silver in 2012
Let's also break this forecast into factors that could push up precious metals prices compared with factors that may pull bullion prices down.
Here are three reasons why I speculate gold and silver prices will remain high and even rise in 2012:
- Quantitative Easing Plan #3: if the U.S. economy won't start to recover, there is the possibility (even if it’s a small one) that the Fed will issue another stimulus plan (QE3);
- Low interest rates: as long as the U.S. will keep its inertest rates low, gold and silver are likely to remain high;
- Slowdown in the U.S. economy: since the U.S is entering an election year, the economic issues are likely to take the back seat; if the U.S. economy will enter a double dip rescission, precious metals are likely to thrive.
Here are four reasons to trade down gold and silver in 2012:
- Recovery of U.S. Economy: If the U.S. economy will show signs of slow recovery as in the last few months of 2011, this may curb the rally of bullion prices and lower the chances of the Fed issuing another stimulus plan (QE3);
- The European Debt Crisis: if the EU will continue to struggle in dealing with the debt crisis, this may also adversely affect gold and silver;
- CME Margins: as seen in 2011, CME is likely to keep a vigilant eye on the development in the bullion market; if there will be a sharp gain, be sure there is the possibility that CME will intervene and raise margins again.
- USD: If the U.S. dollar will continue to strengthen against other currencies including CAD and AUD, this may also negatively affect gold and silver prices.
Considering the statements mentioned above, I speculate there is a good chance gold and silver will perform poorer in 2012 than in 2011. If there will be another stimulus plan or an event that will stir up the markets then there is a small chance that gold and silver will perform better in 2012 than in 2011.
Zeshan Muhammad Ali Awan