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Gold and Silver Trends Depend on US Policy

Commodities / Gold and Silver 2011 May 09, 2011 - 08:42 AM GMT

By: Adrian_Ash

Commodities

THE PRICE OF GOLD reversed half of a 1% rally to $1510 per ounce in London on Monday, easing back as the US Dollar rose on the forex market and European stock markets fell hard.

US crude oil contracts stalled after a 2.7% rally took them back to $100 per barrel.


The silver price rallied to $38.00 at Monday's London Fix, rising more than 11% from Friday lunchtime's Fix.

"More than 36 million ounces of silver [was] dumped into the market between April 26 through this past Thursday," reports the Wall Street Journal of last week's ETF trust-fund holdings, "more silver than all the American Eagle silver coins that investors bought from the US Mint last year."

Slipping back as the start of New York drew near, the silver price on Monday traded more than one-quarter below late April's 3-decade record.

Drifting back down to $1503 per ounce in wholesale London trade on Monday, Dollar gold prices remained 4% lower from last week's new all-time high of $1576.

"Overall, we seem to be witnessing the impact of the unwinding of QE2 with risky assets taking a hit," said one London-based bullion dealer on Monday.

If QE2 has indeed caused a bubble in many asset classes, adds a bullion dealer in Hong Kong, then "the most risky asset class would respond first."

"We do not expect gold to slump excessively in the coming weeks," says a note published by German precious metals group Heraeus. "The political, financial and economic uncertainty seems far too high for this to happen."

"The fundamentals have not changed and investors are back," agrees Naoki Mita, vice president at Barclays Capital.

"Physical demand [for gold] continues to prevail at these lower prices," adds Swiss precious metals group MKS Finance.

"The only notable decline in physical buying has been from China...South East Asian and Indian demand has remained firm."

Over on the forex markets on Monday, the Euro reversed an earlier bounce to trade near Friday's 3-week lows, hit after German newspaper Der Spiegel claimed that Athens is considering taking Greece out of the 17-nation Eurozone currency union.

"We have not been discussing the exit of Greece from the Euro area, this is a stupid idea, it is in no way an avenue we would never take," said Jean-Claude Juncker, president of the Euro finance minister group, after a previously secret meeting late Friday.

Pointing to the next discussion of Greek debt restructuring – scheduled for May 16 – "We don't want to have the Euro area exploding without reason," he added.

Gold prices for Euro investors today rose above €33,750 per kilo, a 1-week high less than 2.5% below Dec. 2010's all-time high.

"It is too early to say that silver has started to rebound, as it is still stuck in a descending channel," said a trader to Reuters in Tokyo, where markets re-opened today after the long Golden Week holidays.

"What will eventually decide the silver price trend is US monetary policy...From a medium-to-long term perspective, $35 is a reasonable level to buy."

With volatility tripling in the last month, "Silver is inherently much more volatile than gold," warns French banking group Credit Agricole in a note.

Gold's daily volatility today stood below its 4-decade average, remaining less volatile than US equity markets.

"Given the magnitude of the pullback [in commodities], it does create an opportunity for more upside potential," says Jeffrey Currie, head of commodity research at Goldman Sachs in London, who last month advised investors to go "underweight" raw materials.

"In the very near term" investors should be "a little cautious," he adds.

"We think that the early May sell-off has recalibrated the markets to more reasonable, but still excessive, valuations," added derivative broker MF Global in its monthly commodity review.

"This is not a turning point," believes Kevin Norrish, London-based managing director at Barclays Capital.

"We'd expect to see a pretty good recovery from these levels before too long."

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


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