November Analysis December 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 November and someperspective as to what is up ahead in December 2013. I appreciate your feedback, soif you have any comments or suggestions don't hesitate to contact me. lior@tradingnrg.com

Thanks, Lior Cohen Tel Aviv. 2nd of December 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 November 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 November………..………..................................Page 32.1.4 Gold & Silver Prices and US Dollar ….………..…........................Page 4 2.1.5 US Treasuries / Gold & Silver Prices – November ….…...............Page 5 2.1.6 Gold & Silver Prices and Other Indexes ……….…..…….…….....Page 6

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

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1.1 Preface Gold and Silver Prices Outlook for December 2013 Precious metals prices resumed their downward trend during November. Theminutes of the penultimate FOMC meeting of the year revealed its membersdiscussed the importance of conveying to the public that tapering QE3 (if and whenit starts) won’t imply the Fed will also consider reducing its cash rate in the nearfuture. In any case, some analysts think the FOMC has left the door open ontapering QE3 in December – the last meeting of the year. Looking forward, willgold and silver bounce back this month? Let's breakdown the upcoming events,decisions and reports that may affect precious metals; let’s start, however, with ashort analysis of November.

2.1 Gold and Silver Prices November 2013

Gold and silver prices sharply fell mostly during the last few weeks of November.Their tumble coincided with the sharp depreciation of the Aussie dollar and Japaneseyen against the USD. By the end of November, the price of gold decreased by 5.52%.The price of silver plummeted by 8.4%. Let's divide November into two parts: the table below divides the month at November6th. I divide the month to demonstrate the shift in pace of gold and silver prices;during the first part of November, gold slipped by 0.4%; silver, by 0.4%. During thesecond part of November, however, gold plummeted by 5.1%; silver price, by 8%.

During the first part of November, the U.S dollar appreciated against the Euro andJapanese yen but slipped against the Aussie dollar and Canadian dollar; the Euro/USDand USD/Yen currency pairs are usually strongly linked with gold and silver. Duringthe second part of the month, the Aussie dollar and Japanese yen sharply depreciatedagainst the US dollar. The chart below presents the shifts of gold and silver during November, in which theprices are normalized to 100 on October 31st 2013.

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The ratio of gold to silver (gold price/silver price) slightly rose during the month. Theratio increased as silver price has under-performed gold price. During the month theratio ranged between 60 and 62.

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

1. The renewed speculations around the FOMC tapering QE3 in December; 2. Based on the recent U.S non-farm payroll report, 204k jobs were added – this

was higher than estimated and may have adversely affected gold and silverprices;

3. The depreciation of several currencies such as Japanese yen and Aussie dollaragainst the USD during the second part of November may have pulled downgold and silver prices;

4. The decision of ECB to cut down its cash rate by 0.25pp to 0.25%; 5. The drop in U.S jobless claims during November; 6. The depreciation of the Indian Rupee may have dragged the demand for gold

in India, among the leading importers of gold; 7. Several U.S reports were positive: Retail sales slightly rose by 0.4% during

November; manufacturing PMI rose to 57.3% during November. Thesereports suggest the U.S economy is progressing and thus may have pulleddown precious metals;

8. The low rise in India’s precious metals demand during Festival season; 9. The ongoing rally 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 duringNovember:

1. The slight appreciation of the Euro against the USD during the second part ofNovember may have curbed down the fall of gold and silver prices;

2. The decision of the FOMC to keep its policy unchanged and not taper QE3; 3. The decision of BOE, BOC, and RBA to keep their respective cash rate

unchanged in November;

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4. Several U.S reports showed little progress: Philly Fed index slipped duringNovember; U.S consumer confidence index declined;

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

The correlation between gold and silver prices further weakened during Novembercompared to October. The correlation reached during November 0.783. If thecorrelation remains strong, it could suggest the effect gold has on silver will remainrobust.

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

2.1.1 FOMC Meeting – Update In the previous FOMC meeting the FOMC decided to maintain its $85 billion a monthasset purchase program. Further, the minutes of the last FOMC meeting were releasedat the end of the month: Members of the FOMC discussed the importance ofconveying to the public that slowly tapering QE3 (if any when it commences) isn’tlinked with the FOMC’s future guidance regarding the progress of the U.S economyand its cash rate decision. The cash rate is likely to remain at its lowest level until theunemployment rate falls below 6-6.5% and the two-year inflation projects remain upto 2.5% annual rate and the and longer-term inflation expectations continue to be wellanchored. Nonetheless, some analysts still suspect the Fed may taper QE3 in the

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December. I remain skeptical. The upcoming FOMC meeting will take place betweenDecember 17th and 18th.

2.1.2 Europe’s Economy – UpdateThe EU economy continues to show little signs of growth. The ECB has decided toreduce its interest rate by 0.25 percentage point to its lowest level in history. Thisdecision may positively affect the EU economy. This news, however, had little effecton the Euro as it remained flat during November.

2.1.3 Gold Holdings during November Russia's gold holding changed direction and slipped for the first time since November2012: During November 2013, its hoards decreased by 0.4 tons. There weren't anyother substantial changes in gold holding among other top gold hording countries. Thetotal global gold supply reached 31,898.60 tons – a 22 tons drop.

Further, by the end of November, the gold holding in the commercial gold trust SPDFdeclined again by 3.3% compared with its gold holding at the end of October. Thecurrent gold holding is set at 843 tons. This is the lowest level in recent years. If thisETF’s gold hoards further fall, it could signal the demand for gold as an investmentcontinues to diminish. Keep in mind, however, the shifts in this ETF is only a signalfor the 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 changes inthe SPDF holding during the month and the price of gold is, as expected, strong andpositive at 0.56. Thus, if gold price continues to fall, the holding in the SPDF is likelyto 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 November 29th):

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The strongest correlations (in absolute terms) with gold price were the followingexchange rates (in brackets are the linear correlation): Euro/USD (0.48), andAUD/USD (0.43); the strongest correlations with silver price were Euro/USD (0.34),USD/YEN (0.32), and USD/CAD (0.14).

The correlations of precious metals with some of these exchange rates weakenedcompared to the previous months especially the "risky currencies" such as Euro andAussie dollar. Thus, these correlations suggest the daily shifts in gold and silver priceswere less related to the changes in the above-mentioned currencies pairs.

The Indian Rupee slightly appreciated against the USD. This change may have partlyaffected the demand for gold and silver; India is among the leading countries inimporting gold. Nonetheless, India’s government decision to augment the tax importon gold has reduced the demand for gold. But if the Rupee further appreciates, thismight indirectly and positively affect bullion prices.

2.1.5 US Treasuries / Gold & Silver Prices – November The US 10-year Treasury yields changed direction and increased throughout themonth. By the end of the month, the 10-year yield increased by 0.18 percentagepoints. The chart below presents the daily changes of gold price and 10 year dailyTreasury bills yields during November (up to November 29th). During November,gold and 10-yr yields have had a mid-strong negative correlation with gold and silver.

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In the chart below are the linear correlations between the daily changes of long termU.S treasury bills yields and daily percent shifts of precious metals prices. Thestrongest correlations between yields and gold were in the mid-long term bonds (10years).

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

If the FOMC starts tapering QE3 in December, this may contribute to the fall indemand for investments such as U.S LT and precious metals.

2.1.6 Gold & Silver Prices and Other Indexes Let's analyze the relation of gold and silver prices with the major indexes includingS&P500 and oil prices during November: During the month, the S&P500 index has out-performed silver and gold. If theS&P500 continues to rally, this may turn investor towards equities and out of preciousmetals.

During November, the price of oil (WTI) also fell by 3.8% while Brent oil slightlyrose by 0.78%. The linear correlation between oil and gold was negative and veryweak. This means that while crude oil price (WTI) and precious metals prices hadsimilar downward trend, their daily percent changes weren’t correlated.

3.1 Outlook for Gold and Silver – December 2013Let’s examine several reports, and events that could affect the precious metalsmarkets: Based on the November report, the U.S employment sharply rose by 204k jobs; thisreport tends to be negatively correlated with gold and silver prices via the U.S dollar.

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The table above shows 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 shifts in precious metals and U.S. employment are mid-strongand negative. In the previous report the expectations were for 130k 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 gold and silver prices. If the nextlabor report (to be published on December 6th) will show growth of over 160k jobs –and above expectations – this may further drag down gold and silver prices.

The ECB will decide on its cash rate during the first week of December; in the lastECB meeting the cash rate was lowered to 0.25%. The current expectations are thatECB will keep its cash rate unchanged. ECB President Mario Draghi may refer to theweak Euro; he may also hint of potential plans to introduce a new LTRO for banksthat agree to use it for lending businesses. In such an event, this may drag down theEuro against the USD. If the Euro falls, this may adversely affect precious metalsprices.

Following the recent FOMC meeting, and the minutes of the last meeting, theexpectations are high as to whether the Fed will announce of any change to its policyin the next meeting, which will be held during December 17-18.

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The chart above shows Google’s trends for the phrase “fed taper” in the past threemonths. As you can see, this phrase didn’t trend much in the past couple of months.So it seems that no news has rekindled the speculations around the Fed’s futurepolicy. Some analysts still think the FOMC will surprise and announce of taperingQE3 in the December. I remain skeptic. Some analysts also voiced their guess that theFed is considering raising the cash rate, which will further pull down bullion rates. Ithink this notion is also premature and isn’t founded. Nonetheless, if the U.S economycontinues to show signs of improved mainly in the labor market, the Fed may starttapering QE3 in the near future perhaps around March/April 2014. The upcomingFOMC meeting will be the last with Bernanke as Chairman. Yellen will lead the Fedat the start of 2014. It’s likely that she will announce the tapering of QE3.

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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But the chart above also shows the detachment of gold price’s trend from the growthof the U.S money base in the past several months. The linear correlation betweenthese data sets (monthly changes, money base lagged by two months) weakened toreach only 0.13. The sharp rise in U.S money base doesn’t seem to positively affectgold price as it may have done in the past. Perhaps the fear of inflation has diminishedin the past year. This finding implies that even if the Fed continues to purchase longterm securities, it will have little positive effect on gold and silver prices. But if theFed tapers QE3, it could drag 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 continues to rise, as they did last month, theycould indicate that traders are taking more risk; thus, more investors are exiting bondsmarket and are getting into riskier investments.

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

The recent appreciation of the Rupee against the USD during the month might havepositively affected the demand for gold. Nonetheless, the India’s governmentintervention by jacking up the import tax has softened the demand for gold.

The correlations among precious metals prices and leading currencies have weakenedlast month. Thus, if major currencies continue to depreciate against the USD, theymight have a moderate adverse effect on precious meals prices.

The upcoming FOMC meeting is likely to among the main turning points for gold andsilver. If the Fed doesn’t change its policy, or if the Fed hints of the date at which itplans to start tapering QE3, this could reduce the prices of gold and silver.Conversely, if the Fed reiterates its stand of keeping the cash rate at its currently lowlevel next year, then this could curb some of the potential drop in prices. My guess,the FOMC won’t taper its asset purchase program in December. In the meantime, theupcoming U.S data on labor, manufacturing, and services markets will offer insight

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behind the progress of the U.S economy. If the upcoming reports show positive signsof growth, they might pressure down precious metals prices. Further, if U.S equitiescontinue to rally, they are likely to weaken the demand for gold and silver asalternative investments. In Europe, if Euro resumes its downward trend, it may alsoslightly and negatively affect gold and silver prices. The drop in demand for GLDETF signals the demand for gold as an investment may be softening. Finally, if thedemand for precious metals in India continues to fall, this could adversely affect thebullion market. In conclusion, I think gold and silver might resume their downward trend and slowlyfall as they did in the past several months.

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

Housing Starts– In the November report, housing starts stats weren’t released; theysuppose to be negatively correlated with gold price (lagged by one day); if in the nextreport, housing starts pick up, it may pull down gold price (the next report will bepublished on December 18th);Consumer Price Index – the U.S CPI edged up again in October by 0.1%; the U.S.CPI is suppose to be positively correlated with silver; thus, if the U.S. inflationcontinues to increase in the upcoming December report, this might pressure up silverprice (the next report will be published on December 17th); U.S Manufacturing PMI Survey – the Manufacturing PMI slightly rose again to56.4%, according to the recent December report referring to November – this meansthe manufacturing sectors in the U.S are growing at a faster pace; if this trendcontinues, it could suggest the U.S economy is further growing, which couldadversely affect gold and silver (the next report will be released 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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