October proved to be a pretty calm month, outside of the on-going fiscal battle in Washington DC. Compared to recent months that saw headlines filled with war, chemical weapons, near economic collapses, and other major events, October was largely smooth sailing. And even the political crisis in DC resolved itself along the lines most analysts expected.
Gold and silver prices rocked up and down throughout the month but closed close to their monthly opening prices. The US fiscal situation was the likely culprit behind the roller coaster ride throughout the middle of the month, while an announcement by the Fed that it will continue with its stimulus plan caused the dollar to strengthen towards the end of the month. A strengthening dollar usually corresponds will dropping gold prices. This caused gold and silver prices to taper off.
Here's a quick recap on prices (all prices per OZ):
· Gold started the month at $1324. The market was quite volatile with prices dropping to $1264 on October 18
th. Prices then surged back to $1353 on October 28
th but couldn't hold the gains before dropping back to $1323
· Silver prices were also volatile, starting at $21.58 dollars per ounce before dropping to $20.78 on October 15
th. Prices peaked at $22.77 before dropping back down to $22.20.
Headlines
Part of the reason for the decline in bullion prices, especially towards the end of the month, was slacking Chinese demand. The recent lifting of bullion restrictions actually helped propel gold prices higher, but that initial bump in demand is slowly cooling off. Chinese investors have actually traditionally been willing to pay more for gold than their Western counterparts, though this gap has now shrunk.
The biggest news, however, is the Fed's announcement that it will continue its stimulus package, causing the dollar to strengthen. This might sound counter intuitive at first glance, after all shouldn't the end of quantitative easing cause the value of the dollar to increase and supply tighten? In the long run, this will most likely prove true. In the short run, however, quantitative easing forces foreign governments to purchase up dollars for various trade related reasons, which in turn increases the value of the dollar. A strong dollar, in turn, results in lower gold prices.
In other news, U.S. gold mine production increased while silver production decreased. In the short run, however, this announcement should not have a major impact, but continuing developments are certainly worth watching. Meanwhile, South Africa’s Association of Mineworkers and Construction Union announced that it would consider a strike after failing to reach any meaningful progress in its negotiations with gold mining companies. A prolonged strike could impact gold supply and bullion prices.
Investment Outlook
November could see more price turbulence, depending on economic and political news across the world. Still, volatility will not likely be as high as October, barring a major event. The European economy has stabilized and appears to slowly be recovering, the U.S. faces no major political confrontations in the coming weeks, and economic growth is likely to expand across Asia.
This might actually cause a slight decrease in gold prices over the short term, but could prime the market for major gains in the long run. Demand for gold in India and China will likely remain high as economic growth remains high in both countries. Meanwhile, demand from developed countries will also likely pick up if their respective economic recoveries continue to gain steam. A growing economy often results in increased demand for gold, especially for luxury products.
Further, the United States will eventually have to end its quantitative easing program. When this occurs, gold prices will most likely experience a short-to-medium term spike in prices as dollars begin to flood back to the U.S., causing the dollar to drop, and worldwide economic volatility increases. Investors willing to wait for the end of America's quantitative easing programs would be wise to consider purchasing bullion in the near term.
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