The bullion market has slowed down during the past three months: during February gold declined by 1.67%, during March by 2.3% and during April by 0.42%. Silver hasn't done any better. The recent FOMC meeting didn't affect gold and silver at the end of April. Since the Fed didn't introduce additional monetary steps to jump-start the U.S economy and the situation in the Euro Zone hasn't improved metals position during the month. Will this stalemate in the precious metals market continue in May?
Let's examine the market for April and provide a short outlook for gold and silver for May. This outlook will obviously also project on the development during May of the trading price of SPDR Gold Trust (NYSEARCA:GLD) , which hasn't done well in recent months.
Bullion decreased during most of April, even though for several parts of the month there was an unclear trend for both metals as they have zigzagged from gains to losses.
Gold (as of April 27th) declined by 0.42%; silver, even more than gold, dropped by 3.3%.
Let's divide April into two parts: I divide the month on April 12th because that was after the effects of the U.S employment report and U.S jobless claims came into play; during the first part of April, gold edged up by 0.5% and silver by 0.1%. During the second part of April, silver declined by 3.4% and gold by 0.9%.
Here are several factors that may have contributed to the fall of bullion during April:
- The FOMC decision to keep its policy unchanged (see below for more);
- The low growth rate (8.1%) of China's GDP in the first quarter of 2012;
- The decline in the S&P500 and oil that are strongly and positively correlated with the changes in metals.
Here are several factors that may have curbed the fall of bullion during the month:
- The U.S labor report of April showed a modest rise in U.S. employment of only 120k (the expectations were 200k); this report is usually negatively correlated with gold and silver;
- The ongoing FOMC pledge to keep rates low until late 2014;
- The news regarding the moderate contraction in the U.S. housing market (including the decline in housing starts);
Outlook for May
Here are several factors to consider that may affect the direction of bullion:
In the April report, the U.S employment expanded by 120k jobs. This report has had a negative correlation with gold and silver prices via the U.S dollar.
The upcoming minutes of the April FOMC meeting to be released on May 16th could shake up the precious metals market even though the meeting itself didn't have much of an effect on the bullion market. If the minutes will reveal a different picture than the one Bernanke painted in the April press conference, this may affect bullion.
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 change for gold and silver prices on the day the labor report was published (column B and C, respectively). The correlations among precious metals and the changes in U.S. employment are very strong and negative.
These correlations aren't significant, but provide an indicator: the change in the labor force tends to be negatively correlated with gold and silver prices. If the upcoming labor report (to be published on May 4th) will not reach the expectations of at least 150k jobs, this may have a positive effect on bullion.
The upcoming minutes of the April FOMC meeting to be released on May 16th could shake up the precious metals market even though the meeting itself didn't have much of an effect on the bullion market. If the minutes will reveal a different picture than the one Bernanke painted in the April press conference, this may affect bullion's direction.
In conclusion, I believe that bullion will not do a lot better than it did the last couple of months. The ongoing concerns regarding the stability of the EU may strengthen the USD. Furthermore as long as the U.S economy is growing at a faster rate than the EU, the U.S dollar will probably remain strong against the Euro. On the other hand as long as the market is stagnating with the Euro/USD not moving out of its range, major commodities may also remain flat. Since the FOMC kept the door open on another stimulus plan, the minutes of the meeting might offer some insight that could stir up the markets. Finally if the U.S labor report doesn't show a big improvement and the U.S economic growth rate slows down (e.g. slowdown in housing market, manufacturing, Philly Fed etc.) then the USD may trade down which may curb the downward trend of bullion.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.