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);

source form: dailyfx

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) remains 0.06 percent lower from the open after moving 80 percent of its average true range, and we may see the downward trending channel give way as the bullish divergence in the 30-minute relative strength index pans out. In turn, we should see the index threaten the upper bound of the downward trending channel, and a push above 9,800 could pave the way for a near-term rally as risk sentiment falters. However, as Fed Chairman Ben Bernanke is scheduled to testify in front of Congress later this week, market volatility may thin ahead of the Henry Hawkins testimony, and the central bank head may dampen the appeal of the greenback should Mr. Bernanke talk up speculation for another round of quantitative easing.

As the relative strength index bounces back from a low of 32, it seems as though the 38.2 percent Fibonacci retracement around 9,710 will act as support, and we should see the USDOLLAR recoup the losses from earlier this month as we expect the shift away from risk-taking behavior to gather pace over the near-term. In turn, the greenback may have put in a short-term bottom ahead of February, but we may see former support around the 50.0 percent Fib (9,830) play as resistance should Fed Chairman Bernanke see scope to expand the balance sheet further. Indeed, we expect the central bank head to highlight the ongoing weakness in the real economy as he keeps the door open to expand monetary policy further, and dovish comments from Mr. Bernanke could dampen the appeal of the USD as market participants retain bets for another round of quantitative easing. Should speculation for QE3 gather pace, the developments could threaten the 38.2 percent Fib (9,710), which would open the door of seeing the dollar fall back towards the 23.6 percent Fib around 9,563.

Three of the four components advanced against the greenback, led by a 0.36 percent rally in the British Pound, while the Euro struggled to hold its ground as the Greek impasse heightens the risk for a default. Indeed, the Greek PSI talks could set precedence for Portugal as the region faces with record-high financing costs, and we may see the European Central Bank encourage the financial sector to take advantage of the three-year loan facility on tap for February as the fundamental outlook for the region turns increasingly bleak. However, we may see ECB President Mario Draghi push the benchmark interest rate below 1.00% in the first-half of the year as the region braces for a recession, but we may see a growing rift within the Governing Council as the ballooning balance sheet comes under scrutiny. As the near-term rally in the EUR/USD fails to produce a break above 1.3250, the pair may have carved out a near-term top in January, and we may see the exchange rate come up against the 23.6 percent Fib retracement from the 2009 high to the 2010 low around 1.2630-50 as the mounting risk for contagion continues to drag on investor confidence.

source form: dailyfx

What’s Expected:

Time of release: 02/01/2012 15:00 GMT, 10:00 EST

Primary Pair Impact: EURUSD

Expected: 54.5

Previous: 53.9

DailyFX Forecast: 53.8 to 55.5

Why Is This Event Important:

The U.S. ISM Manufacturing index is expected to increase to 54.5 in January and the fasters rate of production may spark a bullish reaction in the U.S. dollar as the development dampens the case for another large-scale asset purchase program. As private sector activity gradually gathers pace, Federal Reserve is likely to endorse a wait-and-see approach throughout 2012, and we expect the central bank to soften its dovish tone for monetary policy as the outlook for growth and inflation improves. However, Fed Chairman Ben Bernanke continues to highlight the ongoing slack within the real economy, the central bank may keep the door open to expand monetary policy further, and Mr. Bernanke may see scope to expand the balance sheet further in an effort to encourage an even stronger recovery.

Recent Economic Developments

The Upside

The Downside

The rebound in business investments paired with the rise in private sector credit may encourage businesses to ramp up their rate of projection, and the EUR/USD may continue to give back the advance from earlier this month as the fundamental outlook for the world’s largest economy improves. However, as household sentiment wanes, with Americans scaling back on consumption, firms across the region may scale back on production in order to stay afloat. In turn, a dismal ISM report could dampen the appeal of the dollar, and we may see the EUR/USD make another run at 1.3250 as currency traders raise bets for another round of quantitative easing.

Potential Price Targets For The Release

How To Trade This Event Risk

Forecasts for a faster rate of production instills a bullish outlook for the reserve currency, and the market reaction could pave the way for a long U.S. dollar trade as investors scale back speculation for QE3. Therefore, if the ISM advances to 54.5 or higher from the previous month, we will need to see a red, five-minute candle subsequent to the release to establish a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in order to preserve our profits.

On the other hand, the drop in consumer confidence paired with the slowdown in household consumption may prompt businesses to scale back on production, and a dismal manufacturing report could encourage the Federal Reserve to ease policy further in 2012 as the central bank aims to stem the downside risks for the region. As a result, should the ISM survey fall short of market expectations, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in the opposite direction.

Impact that the U.S. ISM Manufacturing report has had on USD during the last month

December 2011 U.S. ISM Manufacturing

Manufacturing in the world’s largest economy expanded at a faster pace in December, with the ISM index advancing to 53.9 from a revised 52.2, and the development dampens the prospects for another round of quantitative easing as the recovery gradually gathers pace. The breakdown of the report showed the gauge for production advancing to 59.9 from 56.6, with the employment component increasing to 55.1 from 51.8, while inventories contracted for the third consecutive month in December. As businesses boost their rate of production, the more robust recovery will limit the Fed’s scope to push through another large-scale asset purchase program, and we may see the central bank endorse a wait-and-see approach in 2012 as the fundamental outlook for the world’s largest economy improves. The above-forecast ISM print propped up risk-taking behavior, with the EUR/USD extended the advance from the overnight trade, and the exchange rate held steady throughout the North American trade as the pair ended the day at 1.3050.

source form: dailyfx

The greenback is slightly softer at the close of North American trade with the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) off by a fractional 0.9% on the session. Risk appetite quickly subsided at the open after weaker than expected US economic data saw risk assets come off sharply as the dollar pulled back above key support at 9755. Weakness in the housing market continues to loom over the economy with today’s Case-Shiller home price report showing that home prices had fallen 3.67% y/y in November, topping expectations for a decline of 3.30% y/y. Consumer confidence data followed with the January print grossly missing consensus estimates with a print of 61.1, down from a previous read of 64.8. Markets were anticipating an eleven month high print of 68.0 for the month of January. US equity markets promptly reversed gains with the major indices closing mixed on the session after spending the bulk of the day paring losses with the Dow and the S&P off by 0.16% and 0.05% while the NASDAQ eked out a marginal gain of 0.07%.

The dollar briefly broke below key support at the 38.2% Fibonacci extension taken from the August 1st and October 27th troughs at 9756. This level remains paramount for the reserve currency with a break below here risking substantial losses as we head into February. While we noted yesterdaythat the daily relative strength index looked to be reversing course after breaking below RSI trendline support dating back to May 2nd, the oscillator has since flat lined, providing us little in the way of directional bias. That being said, as seasonality trends dictate we look for renewed dollar strength in early February noting that a break below key support eyes the 200-day moving average just above 9700 with topside targets held at the 50% extension at 9850.

An hourly chart shows the index continuing to trade within the confines of a descending channel formation dating back to January 15th. A failed test of channel resistance in intra-day trade saw the index settle above the key 38.2% extension at 9756. A topside break above 9780 eyes subsequent resistance targets at 9820, the 50% extension at 9850, and 9920. Should this channel formation hold over the next 24-48 hours, look for support lower at 9730, 9700 and 9675.

The greenback declined against three of the four component currencies highlighted by a 0.29% decline against the British pound, which was the topic for today’s Scalp Report. The pound has now rallied eleven of the past twelve sessions with the sterling rebounding off key Fibonacci resistance just shy of the 1.58-handle. This level remains a crucial cap to further topside advances with a breach here exposing significant risk to the dollar. The euro was the worst performer of the lot with a decline of nearly 0.50% against the dollar as ongoing concerns regarding stalled Greek PSI talks weighed on demand for the single currency. The pair broke below channel support dating back to the January 15th lows in intra-day trade with the euro now risking further downside moves eying subsequent support targets at 1.3040 and the 1.30-figure.

Tomorrow’s US economic docket is highlighted by the January ISM manufacturing report, the ADP employment report, and December construction spending. Often used as a pre-cursor to the more encompassing non-farm payroll report which is released on Friday, the ADP employment change is expected to show the addition of 185K private sector jobs in January. While the data has often missed substantial spikes in NFP prints, traders will be undoubtedly looking for a strong read ahead of Friday’s crucial print. The ISM manufacturing report is released soon after with estimates calling for a print of 54.5, up from a previous read of 53.9 as the manufacturing sector continues to show signs of improvement. The pace of growth in construction spending is widely expected to soften further with the street eyeing a print of 0.5% m/m, down from previous read of 1.2% m/m. The data would further reinforce recent data out of the housing sector, suggesting the market remains on shaky ground as house prices and pending/existing home sales fell in December. The data has the capacity to further weigh on broader market sentiment after a string of better than expected data over the past few weeks continued to prop up the risk trade. Look for the dollar to move higher as investors go back on the defensive with the dollar acting as the chief beneficiary of risk aversion flows.

Upcoming Events

source form: dailyfx

The New Zealand dollar is the strongest performing currency against a mixed greenback in early US trade with the pair advancing nearly 0.80 on the session. Risk appetite remained well supported in European trade before weaker than expected US economic data weighed heavily on broader market sentiment, with higher yielding risk currencies paring early advances. The S&P Case-Shiller composite came in at -3.67% y/y, missing calls for a read of -3.3% y/y with January consumer confidence grossly missing consensus estimates with a print of 60.2, down from a previous read of 64.8. Markets were looking for a print of 68.0 which would have marked an 11-month high on the survey. Equity markets quickly pared early advances with a wave of risk aversion now dominating the US trade session.

The NZD/USD briefly broke above the 161.8% Fibonacci extension taken from the November 25th and December 15th troughs at 0.8280 before paring gains with interim support eyed at 0.8240, the 0.82-figure, and the 138.2% extension at 0.8160. The pair has continued to trade within the confines of an ascending channel formation dating back to December 15th low with a break below channel support at 0.8115 risking substantial losses for the kiwi. We look for a break of this level later this week as seasonality trends kick in with subsequent downside targets eyed at the 123.6% extension at 0.8085 and 0.8040. Topside resistance holds at 0.8280 with subsequent ceilings eyed at the 0.83-handle and 0.8340.

Key Levels/Indicators

The euro is the weakest performer against the dollar at noon in New York with the pair off by more than 0.50% on the session. The single currency remains at risk as stalled Greek PSI talks and disappointing German retail sales data coupled with the weaker than expected consumer confidence print to halt the overnight rally in risk assets. The euro broke below key channel support dating back to the January 16thlow before encountering soft support at the 1.3065 level. As we’ve cited in earlier reports we look to this weakness in the euro to accelerate heading into the start of February as seasonal trends dictate with a break below interim support eyeing subsequent targets at the 23.6% Fibonacci extension taken from the January 15th and 25th troughs at 1.3030, the 1.30-figure, and 1.2930. Topside resistance is eyed at the 38.2% extension just below the 1.31-handle, 1.3130, and the 50% extension at 1.3150. Tomorrow traders will be eyeing data out of the Euro-zone with the January German and EU manufacturing PMI and the advanced CPI estimate on tap.

Key Levels/Indicators

Upcoming Events

source form: dailyfx

Daily Bars

Prepared by Jamie Saettele, CMT

After piercing channel resistance yesterday, the EURAUD has rolled over and focus is on the low at 12227. An objective moving forward is 12000, which is psychologically significant as well as a measured level (breakout level – width of consolidation = 12227 – (12477-12227) = 11977).

Bottom line: short, stop 12480, target 12000

Euro / British Pound

Daily Bars

Prepared by Jamie Saettele, CMT

Today’s decline confirms my bias that “the EURGBP rally is a corrective 4th wave advance and a new low will be registered (under 8221).” Risk on shorts can be moved down from 8500 to last week’s high (8409). Levels of interest on the downside are the August and July 2010 lows at 8141 and 8066. 8320/35 is near term resistance (if reached).

Bottom line: short, stop 8415, target under 8220

Euro / Canadian Dollar

DailyBars

Prepared by Jamie Saettele, CMT

Friday’s EURCAD surge has been completely retraced and near term focus is on the 1/23 low at 13050. A drop below the January low would expose the January 2011 low at 12776. Risk on shorts should be kept to last week’s high (13251) as a move through there would shift focus to 13360 and 13426.

Bottom line: short, stop 13260, target below 12870

Euro / Japanese Yen

240 Minute Bars

Prepared by Jamie Saettele, CMT

I wrote last week that “the rally from the low is in 3 waves which leaves price vulnerable against 10220.” The EURJPY is again under pressure and near term focus is on the 1/13 high at 9880. The 20 day average is also of interest just below the current level at 9927. Near term resistance is 10000/40 and risk on shorts should be kept to Monday’s high of 10145.

Bottom line: short, stop 10150, targets 9880 and under 9700

British Pound / Japanese Yen

Daily Bars

Prepared by Jamie Saettele, CMT

The GBPJPY has retraced half of its advance from the January low. Additional support comes in at the 20 day average (11937) and 1/11 high (11911). Resistance is 12060 and 12120. I’m on the lookout for formation of an important low (constructive pattern since the September low) in early February.

Bottom line: flat

Australian Dollar / Japanese Yen

Daily Bars

Prepared by Jamie Saettele, CMT

Last week’s comments regarding daily RSI remains valid; “Daily RSI reached 75. Since the carry trade top in July 2007, RSI readings of 75 or more have occurred in June 2007 (end of June), October 2009, April 2009, and April 2011. All were significant tops. A run at the October high cannot be dismissed but the evidence favors selling these levels. The next supports are 8050 and 7975.” 8050 was reached yesterday and price has consolidated between 8050 and 8150 since. Additional resistance is 8165/95 and support comes in from the 20 day average at 8020.

Bottom line: flat

Canadian Dollar / Japanese Yen

Daily Bars

Prepared by Jamie Saettele, CMT

The CADJPY decline has met support from the 20 day average and early January highs at 7587. Continued weakness would target trendline support, which is at 7510 on Wednesday and increases about 3 pips per day. Resistance above today’s high is 7700.

source form: dailyfx

One source aptly notes that the massive deposit by the EU banks to the ECB over the holidays only reflects that these banks prefer the safety of the central bank over lending to other banks or countries that are riddled with debt. In light of this latest bout of risk liquidation, it will be worth watching the Yen crosses over the coming sessions, with a particular interest in a EUR/JPY cross which trades by multi-year lows and threatens a drop below critical psychological barriers at 100.00.

Looking Ahead to 2012 - Foreign Investment in US Equities

While on the surface, the recommendation appears to be non-currency specific, we view this as an extremely attractive opportunity for a portfolio hedge in 2012 and potential arbitrage strategy. Currencies have been broadly outperforming against the US Dollar in recent years and it finally appears as though this trend could be on the verge of some form of a reversal back in favor of the buck. However, long USD positions have also been quite risky and exposure to the Greenback might bring with it some unwelcome stress. As such, our recommendation is foreign investment in US equities. What does this mean?

Here is how we see this playing out. Should current correlations stand, if US equities are to head higher, then the investor will benefit from the US equity return, but at the same time, likely have his/her investment offset by the sell-off in the US Dollar and appreciation in his/her local currency on the resurgence in risk appetite and outflow from the safe-haven US Dollar. If on the other hand US equities head lower, then the risk off market environment will allow the investor to offset his/her loss in US stocks through the appreciation in the US Dollar on its safe-haven flows (remember – the investor in invested in US equities and thereby has USD exposure).

So if this is the case, then where is the benefit in this trade, and why even do it? Well, what if we see a break down in familiar correlations where the US equity market rallies and the US Dollar also rallies at the same time? What if we see a situation where US equities and the US Dollar become positively correlated? In this scenario, the investor stands to benefit a great deal and will not only make money from his investment in US equities, but will also enhance his/her returns on the appreciation in the US Dollar.

The global recession appears to be moving in phases, and with the markets now dealing with phase two of the crisis in Europe, we can start to anticipate the transition to phase three, where we believe that China, the commodity bloc economies and emerging markets will all be exposed. At the same time, we see a first in and first out type of situation, with the US economy the first to emerge from the global recession which should translate into a more upbeat outlook on low valuation US equities and the US Dollar as well, on a narrowing of yield differentials back in favor of the Greenback as the Fed begins to signal a reversal of ultra accommodative monetary policy.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The market is now looking to establish below the critical 2011 lows from January 2011 at 1.2870 and a weekly close below this level will open the door for the next major downside extension towards the 1.2500 area. Overall, we retain a strong bearish outlook for this market and look for setbacks to extend towards the 1.2000 handle over the coming months. While we would not rule out the potential for corrective rallies, any rallies should be very well capped above 1.3500.

USD/JPY:The market has managed to successfully hold above the bottom of the daily Ichimoku cloud to further strengthen our constructive outlook and we look for the formation of a inter-day higher low by 76.55 ahead of the next major upside extension back towards and eventually through the recent multi-day highs by 79.55. Ultimately, only a close back below the bottom of the Ichimoku cloud would negate outlook and give reason for pause, while a daily close back above 78.30 accelerates.

GBP/USD: Rallies have been very well capped ahead of 1.5800 and it looks as though a lower top has now been carved out by 1.5780 ahead of the next major downside extension back towards the October lows at 1.5270. Key support comes in by 1.5400 and a daily close below this level will be required to confirm bias and accelerate declines. Ultimately, only back above 1.5780 would negate bearish outlook and give reason for pause.

USD/CHF: The recent break above the critical October highs at 0.9315 is significant and now opens the door for the next major upside extension over the coming weeks back towards parity. A confirmed higher low is now in place by 0.9065 following the recent break over 0.9330, and next key resistance comes in by 0.9785. Ultimately, only back under 0.9065 would delay constructive outlook.

source form: dailyfx

DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.73 percent higher from the open after moving 135 percent of its average true range, and the shift in trader sentiment should prop up the greenback over the next 24-hours of trade as it benefits from safe-haven flows. As market participants scale back their appetite for risk, the flight to safety should gather pace over the remainder of the week, and bullish sentiment underlining the reserve currency should carry into 2012 as the fundamental outlook for the world’s largest economy improves. However, as the rebound from 9,929 remains heavily overbought, we may see a short-term correction during the overnight session, and the index may fall back towards 9,980 before it continues to move higher.

The daily chart continues to generate a mixed view for the USD as we closely watch the bearish divergence in the relative strength index, but its seems as though the 61.8 percent Fibonacci retracement will act as near-term support as the index carves out a higher low in December. The upward trend in the moving averages points to more dollar strength over the near-term, and the USD should make another run at the 78.6 percent Fib (10,117) as we expect to see a higher high in the index. For 2012, a major driving force for the dollar will certainly be monetary policy as the Fed carries its wait-and-see approach into the following year, and we may see the FOMC endorse a neutral policy stance in the coming months as the economic recovery in the U.S. gradually gathers pace. As the more robust recovery limits the scope for another round of quantitative easing, the central bank should continue to carry out ‘Operation Twist’ next year, and we may see Fed Chairman Ben Bernanke soften his dovish tone for monetary policy as growth and inflation picks up.

All four components weakened against the greenback, led by a 1.28 percent decline in the British Pound, and the sterling is likely to face additional headwinds over the near-term as the U.K. teeters on the brink of a recession. In turn, we expect the Bank of England to expand its asset purchase program beyond the GBP 275B target, but the central bank may take aggressive steps to shore up the ailing economy as policy makers see an increased risk of undershooting the 2 percent target for inflation. However, as the GBP/USD maintains the broad range from the end of November, the exchange rate looks as though it will continue to trend sideways ahead of the New Year, and we may see the rebound from 1.5460 gather pace over the next 24-hours of trading as the pair remains oversold.

source form: dailyfx

Gold and silver started the last week of the year with moderate falls. Will this slow crawl down of precious metals continue this week? Today, the KOF Economic Barometer report will be published.

Gold slightly declined on Monday by 0.65% to $1,595.5; silver on the other hand slightly declined by 1.18% to $28.74. The chart below shows the development of gold and silver during December (normalized gold and silver prices to November 30th 2011). During December gold declined by 8.8% and silver by 12.4%.

The Euro/USD slightly rose on Monday by 0.21% to reach 1.3072. Furthermore, other exchange rates also moderately appreciated against the USD. If major currencies will change direction and depreciate against the USD, it may also affect gold and silver to further decline.

The ratio between gold and silver slightly rose on Monday, December 27th and reached 55.51. During the month the ratio gained 4.0% as gold has outperformed silver.

U.S. Consumer Confidence Rose in December

According to the recent U.S. survey, the consumer confidence index inclined from 55.2 (1985=100) in November to 64.5 December. American consumers’ short term outlook in U.S. business conditions has also improved according to the report. This mews may have been among the factors to pull up energy and push down precious metals during yesterday’s trading as explained in the related post.

On Today’s Agenda

KOF Economic Barometer: this report offers a forecast of the Swiss economy in the months to come. In the recent press release, the report predicted that the Swiss Economy is headed towards stagnation in 2012;

Gold and Silver Outlook:

Gold and silver moderately declined during recent weeks: gold price has declined during the past four business days, each time by less than one percent drop. Despite the rally in oil, and Forex markets (such as CAD), gold and silver continued to decline. I speculate this slow crawl down of precious metals might continue throughout the remainder of the week, unless there will be a breaking news that could stir up the marketssuch as new development about the European debt crisis or the economic progress of the U.S.

source form: dailyfx

USD/JPY:The market has managed to successfully hold above the bottom of the daily Ichimoku cloud to further strengthen our constructive outlook and we look for the formation of a inter-day higher low by 76.55 ahead of the next major upside extension back towards and eventually through the recent multi-day highs by 79.55. Ultimately, only a close back below the bottom of the Ichimoku cloud would negate outlook and give reason for pause, while a daily close back above 78.30 accelerates.

source form: dailyfx