Gold, silver drop on firm dollar, rate hike in India

Silver prices continue to dive after Monday's sell-off, losing another 7%. Gold sheds more than 1%.

By TheStreet Staff May 3, 2011 10:26AM

Gold © Comstock Images/JupiterimagesthestreetBy Alix Steel, TheStreet


Updated at 4:34 p.m. ET


Gold and silver got pummeled Tuesday on a stronger U.S. dollar and a surprise rate hike in India.


Gold (-GC) for June delivery settled down $16.70 to $1,540.40 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,551.40 and as low as $1,516.20,  but was tanking almost $30 in after-hours trading. The spot gold price was down $7.80, according to Kitco' gold index.


On the heels of Monday's sell-off, silver (-SI) prices tumbled another $3.50, or more than 7%, to close at $42.59 an ounce. The CME has raised margin requirements again for silver by 11.6%, the third time in a week. It will now cost a trader $16,200 to buy a 5,000-ounce futures contract. The move will go into effect Tuesday after market close, and leveraged traders could dump positions to avoid having to pay more for silver. In stark contrast, it costs only $6,751 to buy a 100-ounce gold contract.

In the latest commitment of traders report ending April 26, speculative long positions in silver sank 10.8%, while short positions -- those betting the metal's price will fall -- jumped 24%. For gold, speculative longs sank 5% and short positions were flat.


Both metals struggled Tuesday as the price ratio between gold and silver continues to adjust. It is now at 35:1, compared with 31:1 when the metals were at recent highs.


"This weekend's outlier aside, silver tends to match-and-extend whatever gold's doing. So a rising gold/silver ratio typically comes together with falling prices for both," says Adrian Ash, head of research at "Anyone expecting a shift back to the historical or pre-modern levels (of 16 and 12 respectively) should note the ratio's huge swings through 1979 and 1980."


Mark Johnson, a co-manager of USAA Precious Metals and Minerals Fund, thinks the gold-to-silver ratio should be closer to 60 rather than 30 and has only a 0.5% position in silver. "Five months ago (we had) 8% silver, and now (we have) less than 0.5% in silver." If the ratio reached 60:1, Johnson would get interested in the metal again.


"Gold will do better," says Johnson, who thinks that recent silver mines will ramp up supply so fast that it will overtake demand. "We view volatility (in gold) as an opportunity. . . . (During) significant downward moves we are in there buying"


Leading the charge against gold and silver is a stronger U.S. dollar, with the U.S. dollar index adding 0.1% to $73.15, and a surprise interest-rate hike in India.


India raised rates by 50 basis points to fight inflation, currently at 8.89%, with the overnight lending rate at 7.25%, but negative real interest rates still persist.


Australia's central bank also warned of rising inflation but took no rate-hike steps, and the heat mounts for the Bank of England and the European Central Bank when they meet on Thursday. With growth and manufacturing activity in England anemic, at best, no rate hike is expected, and the ECB, which raised rates 25 basis points at its last meeting, is not expected to raise rates in consecutive sessions. Nevertheless, hawkish commentary should emerge with inflation in the UK at 4% and the EU at 2.7%.


"Gold and silver are . . . in much need of a bout of consolidation," says James Moore, a research analyst at, "with silver particularly vulnerable to long liquidation . . . But with real interest rates still largely negative, the rise in terror concerns and ongoing issues, gold is more likely to be cushioned." Many experts are still waffling in trying to find a range for silver but think $1,500 is a good support level for gold.


One puzzle in the gold community is the lack of leverage that gold stocks currently exhibit. Monday, when gold rallied nearly $20 intraday, Barrick Gold (ABX) ended the day down 2.7%. So either the gold stocks are a leading indicator of a further sell-off in the gold price, or the days of gold stocks providing 2:1 leverage have disappeared.


Johnson thinks the leverage will come back as input costs, particularly oil, stabilize and the gold price moves higher. "They do de-link. . . . Oil stabilization (is) a catalyst for the gold price." Johnson lists Iamgold (IAG) as his favorite gold stock.


Other analysts think that once companies report first-quarter earnings and deliver good production, manageable cash costs and free cash flow, markets will respond accordingly.


Leo Larkin, an equity analyst with Standard & Poor's who follows Barrick, Newmont Mining (NEM) and Randgold Resources (GOLD), says investors would just rather buy the physical metal or the SPDR Gold Shares (GLD) rather than be exposed to the risks of miners.


"The ease to which you can gain exposure from the GLD (is) detracting from investing in the stocks." Larkin says that good cash flow hasn't made a difference for the stocks in the past and that, in general, earnings are looking good for most companies with good production and cash flow.


Some companies might ramp up their dividends to attract investors, but in the end, "if the gold price really starts to accelerate and input costs don't go up as much as the price of gold, . . . then you might finally see the stocks react," says Larkin.

The immediate worry is that gold stocks are foreshadowing lower gold prices, but Larkin says it's a different environment, with more physical buying of gold and more companies offering gold storage. Larkin has no affiliation with or ownership in any of the stocks he follows.


Stocks were sluggish Tuesday, with the Dow Jones Industrial Average ($INDU) finishing the day flat at 12,807.5. The S&P 500 ($INX) ended down 5 points at 1,357 while the Nasdaq ($COMPX) lost 22 points to close at 2,842.


Gold mining stocks fell along with the metal Tuesday. Barrick Gold ended down 2.1% to $48.62, while Newmont slipped 2.3% to $56.22. Randgold fell 2.1% to $81.98, and AngloGold Ashanti (AU) tumbled 4.4% to finish at $48.18.


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May 3, 2011 11:38AM
Our dollar is so strong that China has so many of them and can't get rid of them fast enough.  Many countries however will not accept them. I just don't understand why unless it is because the nation is already known to be heading for "default". I see that we now have a C grading when in all actuality if the truth be told we should already have an F grade. I usually do not comment in forums, but I found myself wondering why people would even take heed to believing that we have a "firm dollar" as you say. Good grief!
May 3, 2011 6:04PM
I'm glad I kept all them 'silver dollars' I got when I was 'stationed near' Los Vegas....If you got a pack of gun and gave them a $20 you got 19 silver dollars back.  I kept all mine...A little over 6 thousand of them I have put away....Think I'll buy a nice Sailboat.
May 3, 2011 4:08PM
but I found myself wondering why people would even take heed to believing that we have a "firm dollar" as you say
don't be fooled by the leftwing democratic socialist machine; ask anyone on the street and they have a different answer! hugo chavez states his people love him........the pistola's were out; but they love him!Don't tell anyone
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