August Analysis September Outlook

2013

By

Lior Cohen

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Introduction Dear Reader,

Thank you for downloading the recent precious metals market report. I hope thisreport will be interesting for you to read, and will provide you with some insight ofthe recent developments in the gold and silver markets during August and offer someperspective as to what is up ahead in the precious metals market in September 2013. Iappreciate your feedback, so if you have any comments or suggestions don't hesitateto contact me. lior@tradingnrg.com

Thanks, Lior Cohen Tel Aviv. 1st of September 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 August 2013- Analysis …...….…....................…....Page 1

2.1.1 FOMC Monetary Policy – Update ………..….……..…..….....…Page 3 2.1.2 Europe’s Debt Crisis – Update ……………….…………….……Page 3 2.1.3 Gold Holdings in August……………………................................Page 4 2.1.4 Gold & Silver Prices and US Dollar ….….……..…......................Page 4 2.1.5 US Treasuries / Gold & Silver Prices – August ….…..…..............Page 5 2.1.6 Gold & Silver Prices and Other Indexes ……….…..………….....Page 6

3.1 Outlook for Gold and Silver Prices – September ………….……...……......Page 6 Appendix …………………………..………………….…….……..…...............Page 8

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1.1 Preface Gold and Silver Prices Outlook for September 2013 The precious metals market has heated up this summer as both gold and silverprices spiked during August. Will the recent rally hold up and keep bullion priceselevated or will gold and silver prices change direction and fall? Many preciousmetals investors are waiting for the next FOMC meeting, in which the Fed mayannounce it will start tapering its asset purchase program. In the previous FOMCmeeting, the monetary policy remained unchanged. Besides the FOMC meeting,let's breakdown the upcoming events and publications that may affect the preciousmetals market, which will unfold during the month; let’s also provide a shortanalysis for August.

2.1 Gold and Silver Prices August 2013

Gold and silver prices sharply rose during August. Their rally didn’t coincide with themovement of the Euro and Japanese yen against the USD. By the end of the month,gold increased by 6.35% (as of August 30th); silver, by 19.61%. For silver this was thebest performing month in the past several years. For gold, this was the second bestperforming month in 2013. Let's divide August into two parts: the table below divides the month at August 9 th; Idivide the month to demonstrate the shift in pace of gold and silver prices; during thefirst part of August, gold remained flat; silver rose by 3.9%. During the second part ofAugust, however, silver spiked by 15.1%; gold price rallied by 6.3%.

During the first part of August, the U.S dollar depreciated against the Euro, Japaneseyen and Aussie dollar; the Euro/USD and AUD/USD currency pairs are usuallystrongly correlated with gold and silver. During the second part of the month, theEuro, Aussie dollar, Canadian dollar and Japanese yen depreciated against the USD. The chart below presents the developments of gold and silver during August, in whichthe prices are normalized to 100 on July 31st 2013.

The ratio of gold to silver (gold price/silver price) sharply fell during the month. Theratio decreased as silver price has out-performed gold price. During the month theratio ranged between 67 and 57.

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Here are several factors that may have positively affected gold and silver duringAugust:

1. The appreciation of several currencies including Euro, Japanese yen andCanadian dollar during the second part of August;

2. Some U.S reports were not as good as many had anticipated: new home salesfell last month; Philly Fed index tumbled down during August;

3. The decision of BOE, BOC, and ECB to leave their respective cash rateunchanged in August;

4. According to the last U.S non-farm payroll report, 162k jobs were added – thiswas lower than expected any have pulled up gold and silver prices;

5. The decline of U.S equity markets that serve as an alternative investment forprecious metals;

6. The appreciation of several currencies such as Euro and Aussie dollar at thefirst part of the month against the USD;

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

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

1. The minutes of the FOMC meeting didn’t offer new information but may haveslightly curbed down the rally of precious metals;

2. The decision of RBA to lower its cash rate by 0.25pp to 2.5%; 3. Several U.S reports showed progress: Manufacturing PMI rose to 55.4; retail

sales edged up by 0.2% during August; existing home sales jumped lastmonth; GDP for the second quarter rose by 2.5%. These reports suggest theU.S economy is progressing and thus may have pulled down precious metals;

4. The recent decrease in the U.S jobless claims during most of August; 5. The depreciation of the Indian Rupee may have dragged down the demand for

gold in India, among the leading importers of gold; 6. The depreciation of the Indian Rupee, which may have curbed the demand for

gold and silver in India; 7. The depreciation of the Euro and Aussie dollar may have curbed the rally of

gold and silver prices during the second part of the month;

The correlation between gold and silver prices slightly strengthened during Augustcompared to July. The correlation reached during August 0.885. This means therelation between gold and silver is stronger than it was in July. Moreover, the relationbetween the two precious metals remains positive and robust. If the correlation willremain strong, it could suggest the effect gold has on silver will remain robust(assuming of course you agree that gold is leading the way in this relation).

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The standard deviations of gold and silver prices during August declined againcompared with their standard deviations in July. This means, the volatility of gold andsilver prices shrank in August.

2.1.1 FOMC Meeting – Update The main issue remains when the FOMC will decide to cut down its asset purchaseprogram that includes $85 billion a month of long term securities. In the next meetingduring September 17-18 the FOMC might announce it will reduce its asset purchaseprogram. If the Fed doesn’t announce the tapering QE3, this could result in gold andsilver prices resuming their rally.

2.1.2 Europe’s Debt Crisis – UpdateThe EU economy continues to some signs of progress. Nonetheless, during the pasttwo weeks, the Euro declined against the USD. The ECB kept its basic interest rate at0.5%. The German elections are likely to result in Draghi keeping the rate unchangedso his actions won’t affect in some way these elections. If the ECB will keep its rateunchanged again, this could keep the Euro from further falling.

2.1.3 Gold Holdings during August Russia's gold holding slightly rose: During August, its hoards increased by 0.3 tons.There weren't any other substantial changes in gold holding among other top goldhording countries. The total global gold supply reached 31,909.70 tons – a 40.90 tonsgain.

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Conversely, by the end of August, the gold holding in the commercial gold trust SPDFdecreased by 0.68% compared with its gold holding at the end of July. Despite thedecline in holdings during the month, the ETF’s gold hoards increased in the pastthree weeks. This may signal a shift in the demand for gold as an investment. If thisETF’s gold hoards change direction and rise, it will signal indicate the demand forgold as an investment is picking up. A note: the linear correlation between thechanges in the SPDF holding during the month and the price of gold is, as expected,strong and positive at 0.57. Thus, if gold price continues to rise, the holding in theSPDF is likely to pull up.

2.1.4 Gold & Silver Prices and U.S Dollar Here below are the correlations among major currencies and precious metals prices(up to August 30th):

The strongest correlations (in absolute terms) with gold price were the followingexchange rates (in brackets are the linear correlation): USD/CAD (-0.41), Euro/USD(0.30), and AUD/USD (0.22); the strongest correlations with silver price wereUSD/CAD (-0.44), Euro/USD (0.35), and AUD/USD (0.27).

The correlations of precious metals with some of these exchange rates weakenedcompared to the previous months especially the "risky currencies" such as Aussiedollar and Euro. Thus, these correlations suggest the daily developments in gold andsilver prices were less related to the changes in the above-mentioned currencies pairs.

Keep in mind the ongoing depreciation of the Indian Rupee against the USD (mainlyat the end of the month) might have also affected the demand for precious metals;

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India is among the leading countries in importing gold; if the Rupee will continue todepreciate it might indirectly and adversely affect precious metals prices.

2.1.5 US Treasuries / Gold & Silver Prices – August The US 10-year Treasury yields rose mainly during the first part of August. By theend of the month, the yield increased by 0.18 percent points. The chart below showsthe daily shifts of gold price and 10 year daily Treasury bills yields during August (upto August 31st). During most of August gold and 10-yr yields have had a negativecorrelation with gold and silver.

In the chart below are the linear correlations between the daily shifts of long term U.Streasury bills yields and daily percent changes of precious metals prices. The strongestcorrelations between yields and gold were in the short term bonds (7 years).

For the 10 year bonds the correlations between the yields and precious metals priceswere also strong in the preceding month.

If the FOMC will announce tapering QE3 this may contribute to the drop in demandfor investments such as U.S LT and precious metals.

2.1.6 Gold & Silver Prices and Other Indexes Let's analyze the correlation of gold and silver prices with the major indexes includingS&P500 and oil prices during August: During the month the S&P500 index has under-performed silver price and gold. If theS&P500 continues to fall, this may turn investor to stir away from equities and getback to precious metals.

During August, there were negative and weak linear correlations between the dailypercent changes of gold and silver prices and WTI oil price. This means the changes

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in crude oil price during the month coincided with the changes of gold and silverprices.

3.1 Outlook for Gold and Silver Prices – September 2013Let’s analyze several reports, markets and events that could influence bullion preciousmetals traders: According to the August report, the U.S employment increased by 162k jobs; thisreport tends to be negatively correlated with gold and silver prices via the U.S dollar.

The table above presents the dates of the announcements of the U.S. labor report, thechange in employment (column A), and the daily percent shifts for gold and silverprices on the day the labor report was published (column B and C, respectively). Thecorrelations among precious metals and the changes in U.S. employment are mid-strong and negative. In the previous report the expectations were for 200k growth inemployment.

These correlations aren't significant, and may vary over time. Moreover, theexpectations for the labor report tend to also play a role in affecting the direction ofgold and silver price. If the next labor report (to be published on September 6th) willshow growth of more than 200k jobs, this may pull down gold and silver prices.

The ECB will decide during the first week of September on its interest rate; in theprevious ECB meeting the rate remained unchanged at 0.50%. Mario Draghireiterated his pledge to leave rates unchanged in the near future. The currentexpectations are that ECB will keep its rate unchanged. If the Euro resumes itsdownward trend against the USD, this may adversary affect precious metals prices.

Following the last FOMC meeting, which was held on July 30-31, the FOMC didn’tchange its policy nor gave any strong hints regarding its future plans. On September17-18 the FOMC will hold another meeting. This meeting is anticipated becausemany think this will be the one, in which the Fed will announce tapering QE3 or at

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least will provide a more specific timetable. My guess is that the FOMC won’t starttapering QE3 this year considering the slow progress of the U.S employment, uncleardirection in other aspects of the economy such as production and the lack ofinvolvement of U.S policymakers in improving the economy. If the Fed doesn’t starttapering QE3, I think the positive effect on gold and silver won’t be strongconsidering their rally in the past couple of months. Conversely, if the Fed startstapering QE3, this could result in gold and silver tumbling down. Let’s see why.

In the table below are the recent FOMC meetings and the changes in the prices ofgold and silver.

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 continue to augment the U.S money base as seen in the chart below.

Nonetheless, the chart above also presents the detachment of gold from the progressof the U.S money base. The linear correlation between these data sets (monthlychanges, money base lagged by two months) weakened to reach only 0.12. The sharpincrease in U.S money base doesn’t seem to pull up the price of gold as it may havedone in previous years. Perhaps the fear of inflation has diminished in recent months.This finding suggests that even if the Fed keeps its asset purchase program, it willhave little positive effect on gold and silver prices. But if the Fed tapers QE3, it couldpressure down gold and silver prices.

If the long term yields of the U.S. Treasury bills further rise, as they did in recentweeks, this could indicate that traders are taking more risk; thus, more investors areexiting bonds market and are getting into equities. Nonetheless, the slowdown in theU.S equity markets may have pushed investors towards precious metals. If stockmarkets continue to decline, this may pressure up precious metals prices.

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The U.S government will need to decide in the coming months on further budget cuts.U.S policymakers already decided to cut $85 billion from the budget in 2013. Thisstep may drag down the growth in U.S economy. If so, this might curb the rally of theequities markets and may pull up bullion rates.

The correlations among precious metals prices and leading currencies have weakenedin recent weeks. Thus, if major currencies continue to depreciate against the USD,they might slightly adversely affect precious meals prices.

The ongoing depreciation of the Rupee against the USD during the month might haveadversely affected the demand for gold. Furthermore, the decision of Indianpolicymakers to raise the base rate on import taxes earlier this year, may drag downthe demand for gold in India, among the leading countries in importing gold.

The FOMC meeting may affect the financial markets: If the Fed decides to taper QE3this could result in gold and silver resuming their downward trend. My guess,however, the FOMC won’t start tapering its asset purchase program just yet. In sucha case, precious metals might slightly rise. In the meantime, if the U.S economyshows signs of growth, this might persuade FOMC members to start tapering QE3and thus it may pull down precious metals prices. Conversely, if U.S equities continueto fall, this is likely to strengthen the demand for gold and silver as alternativeinvestments. In Europe, if the EU economy continues to show some progress and ECBkeep interest rate unchanged, the Euro might rally, which may also positively affectgold and silver prices. The rise in recent weeks in the amount of gold held by GLDETF suggests the demand for gold as an investment is starting to rise. Finally, if thedemand for precious metals in China and India rise, this could positively affect thebullion market. In conclusion, I guess gold and silver prices might slightly rise duringSeptember. This rally, however, will not last long, if the U.S economy keeps growingand if the FOMC changes its monetary policy and cuts down its asset purchaseprogram.

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

Housing Starts– In the August report, housing starts rose by 5.9% and is suppose to benegatively correlated with gold price (lagged by one day); if in the next report, thehousing starts will continue to rise, it may pull down gold price (the next report willbe published on September 18th);Consumer Price Index – the U.S CPI rose again in July by 0.2%; the U.S. CPI issuppose to be positively linked with silver; thus, if the U.S. inflation will continue torise in the September report, this might pull up silver price (the next report will bepublished on September 17th); U.S Manufacturing PMI Survey – the Manufacturing PMI rose again to 55.4%,according to the latest September report referring to August – this means themanufacturing sectors in the U.S are growing at a faster pace; if this trend will persist,it could suggest the U.S economy is improving, which could adversely affect gold andsilver (the next report will be published on September 3rd). In any case, these reports have had moderate and short term effect (at best) on the pathof gold and silver in the past; thus, these reports might continue slightly affect goldand silver rates in the short term.

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