FMX | Connect – www.fmxconnect.com - (Reported 4/22/2011)
METALS OUTLOOK: Gold, Silver Strength Could Continue, But Watch For Potential Correction
By Debbie Carlson
Of Kitco News
http://www.kitco.com/
Gold prices hit the $1,500 an ounce level this week and silver tagged a new multi-decade high as dollar weakness and a general desire to hold precious metals underpinned prices.
The long-term outlook for the markets is strong, but some analysts said gold could see a potential brief correction before resuming the upward trend.
June gold futures on the Comex division of the New York Mercantile Exchange settled at $1,503.80 up 1.18% on the week, having traded as high as $1,509.60 while May silver gained 7.6% to settle at $46.059 an ounce. It rose as high as $46.385.
After much anticipation, gold futures surpassed the $1,500 level without much fanfare, a price target nearly every precious metals market watcher had been forecasting for some time. Gold added slightly to that area on Thursday ahead of a three-day weekend for the market. Financial markets are closed Friday for the Good Friday holiday.
George Gero, vice president and precious metals strategist at RBC, said he was surprised gold and silver did not see profit-taking going into the long weekend. “What that says to me is that the sellers aren’t out there and the buyers are fearful of any negative headlines over the weekend,” he said.
The severe dollar weakness has been partially responsible for the gains in gold and silver as the greenback fell to new lows for the year against several currencies. Gero said the question is whether silver and gold have priced in all the world’s ills, and he believes the answer is no. “This is still a tremendous bull market,” he said, citing continued problems in the Middle East and worries over the eurozone, among other concerns.
“Gold and silver continue to be a political and economic barometer,” he said.
Bullishness in the futures market can be seen in a pick-up in buying of out-of-the-money calls. Gero noted strong interest in the August $50 calls in silver and the December $1,800 gold calls. An out-of-the-money option is an option that is priced higher than current values. It becomes in-the-money if futures prices rise to that area. Buying calls are bullish trades.
Gold and silver are likely to continue higher at least early next week as Gero said momentum traders are also participating in the rallies in these precious metals. “Open interest is up, volume is high, moving averages are up, we have higher closes. All of that attracts momentum traders,” he said.
While the longer-term trend for gold is not in doubt, many analysts have pointed out that gold’s recent price patterns have been to have a mild correction after making a new high.
“Is this time different? I doubt it. Look for a sharp ‘whack’ soon that takes gold to (around) $1,480 where it will find support again,” said Ken Morrison, founder and editor of online newsletter, Morrison on the Markets.
Looking ahead to next week the main event that looms on the news horizon is the April Federal Open Market Committee meeting which takes place April 26-27. This will be the first time Fed Chairman Ben Bernanke speaks after the FOMC decision is announced. While no movement is expected on interest rates, there will be great interest in what Bernanke says afterward.
“We’re not looking for any major changes, but certainly if there is going to be one it’ll be because the U.S. dollar is breaking down pretty hard. That could force the Fed’s hand. I think all eyes are on QE2 (second quantitative easing) and if there is going to be a QE3,” said Ron Coby, co-founder of Coby Lamson Capital Management.
Morrison said the dollar is something to watch in the very short-term. He said because so many traders have bearish positions on the dollar, there could be some profit-taking ahead of the meeting which would give the greenback a bounce.
“It's ripe for any catalyst that would rally it and run in the shorts. I expect next week's FOMC meeting may be such a catalyst or possibly just before as shorts may prefer to take some profits in advance of the meeting…. Any rally, however brief, in the dollar would be a negative catalyst especially for … gold and silver,” he said.
Rich DeFalco, president of West Cooper Asset Management, said gold and silver are subject to bouts of profit-taking and corrections, but the long-term trend is up. “I don’t see what’s going to stop it. Nothing. Not anything. Even silver, which is a bit nutty right now,” he said.
DeFalco said it’s easy to see gold going to $1,600 and possibly $2,000 by year’s end.
In the near-term gold and silver are likely to keep an eye on the corporate earnings calendar, as companies are reporting their profit and losses for the quarter. That could give the metals some day-to-day guidance.
Considering the factors that have supported the metals thus far have not changes, there’s no reason for the trend to change, DeFalco said. In fact, the move to $1,500 in gold could inspire new buying as many investors still haven’t entered the market. “People see this (rally) and think I’ve missed so much already, that I don’t want to miss any more,” he said.
It’s a difficult investing now in general, he added. “No one has expertise in this environment. You talk to people who’ve been in the markets 50 years and they’ve never seen anything like it…. You have to go back to the 1880s for something similar – good luck finding someone from then,” he said.
By Debbie Carlson of Kitco News dcarlson@kitco.com
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