Gold, Silver Prices Recover After Carnage

Both gold and silver are seeing improvements after last week's huge sell-offs. According to data, it looks like gold is going to have more support and therefor a better run over silver in the next few sessions.

By Alix Steel
05/09/11 - 02:45 PM EDT
THE STREET

NEW YORK(THE STREET)- Gold and silver prices recovered Monday after a painful selloff last week as bargain hunters stepped in.

Gold for June delivery added $11.86 to settle at $1,503.20 at the Comex division of the New York Mercantile Exchange after falling 4.8% in a week. The gold price Monday has traded as high as $1,512 and as low as $1,489. The spot gold price was rising $13.10, according to Kitco's gold index.

Silver prices rose $1.82 to close at $37.11 an ounce after plummeting 27% last week.

The consensus seems to be that silver has more downside now than gold. Barclays Capital thinks that silver will find support in the low $30s as "retail demand" takes the lead but that "longer-term investor interest in gold remains robust." Barclays cites Asian demand as a key factor for higher gold prices.

Goldman Sachs seems to be in agreement, issuing a 12-month silver price target of $28.20 with silver slipping as low as $24.70 in the next three months, while gold's one-year target is $1,690 an ounce after falling to a three-month low of $1,480.

"There is overhead resistance in silver," said David Morgan, founder of silver-Investor.com, "the ratio will favor gold" for a while. The ratio refers to how many ounces of silver it takes to buy an ounce of gold. The ratio fell to as low as 31 when silver hit a recent intraday high of $49.82, and has now risen to 40.

"We're seeing gold outperform silver on a ratio basis ... I'm not that eager to get back into the market," Morgan said.

Morgan thinks the ratio could move even higher, as much as 50:1, which implied more downside from the $36 level, but that long term he is sticking by his ratio of 16:1.

"The fundamental fact remains that you cannot print wealth, and as long as Federal Reserve Chairman Ben Bernanke and other central bankers in the world try to print wealth you're going to have more and more upside for the metals," he said.

The Commodity Futures Trading Commission's bank participation report for May shows that gold long positions fell 7% as of May 1 compared to April 1, but short positions stayed relatively the same, whereas silver's long position rose 25% and short positions fell 18%.

"I think that as we neared the expiration of the May contract of silver, we saw more aggressive buying in the silver versus the gold," says Brian Booth, senior market strategist at Lind-Waldock. "I think traders had $50 silver in mind for a target ahead of the May expiration."

Booth thinks that gold could be headed for some margin hikes of its own despite the fact that the market is more liquid and historically less volatile than silver.

Gold and silver breathed a sigh of relief Monday as the U.S. dollar index was volatile, currently falling slightly. The currency rallied more than 3% last week as the euro tanked on rumors that Greece might leave the European Union and on speculation that the European Central Bank won't raise rates at its July meeting, which had been widely expected. The lack of consistent and aggressive rate hikes will leave negative real interest rates in the EU for longer than anticipated, now at a negative 1.55%.

Further helping gold and silver Monday was Standard & Poor's downgrade of long and short term Greek debt to B and C, respectively. Although a "default" might be off the table, more creative "defaults" like extending current bond maturity, meaning Greece can take longer to pay back debt, are being considered. All of which helps gold and silver as safe haven assets.

However, it doesn't mean the recent correction in gold and silver is finished. James Moore, research analyst at FastMarkets, thinks that volatility could remain high with participants protecting themselves against more long selling.

"While the corrections are likely to entice fresh demand from physical and investment sources, buyers may hold off until some price stability emerges with the metals still vulnerable to downside pressure," Moore said.

were moving higher. Yamana Gold(KGC) was adding 1.03% to $11.92 while Freeport McMoRan Copper & Gold(FCX) was up 2.41% to $51.38. Other gold stocks, New Gold(NGD) and Gold Fields(GFI) were trading at $9.98 and $16.05, respectively.

--Written by Alix Steel in New York.

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