Gold, silver swing back from early highs

By Alix Steel, TheStreet

 

Gold and silver prices notched modest gains as a recovering U.S. dollar capped early highs.

 

Gold for June delivery added $5.30 to settle at $1,509.10 an ounce -- after hitting a record $1,519.20 -- at the Comex division of the New York Mercantile Exchange. The spot gold price was up $3.20, according to Kitco's gold index.

 

Silver prices roared out of the gate Monday, nearly conquering their record high of $50 an ounce, adding as much as $3.03 to $49.10 an ounce. The 6% daily move was sizable even for silver, and the metal pared some of those early gains to settle up $1.09 at $47.15 an ounce.

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Many analysts are calling for a correction or even a sell-off in silver. Scott Redler, the chief strategic officer at T3Live.com, started shorting silver last week: "I am still net short, and I am getting hurt into this parabolic move. . . . Do not get excited and buy into silver."

 

Redler trades the iShares Silver Trust (SLV), which added 106 tons last week as investor demand ballooned.

 

"The first time around is always great to get short, because you can stop yourself out," says Mihir Dange, a trader at Arbitrage. "I am looking for a pullback before silver attempts to make another high."

 

A weaker U.S. dollar has been fueling the recent rally in precious metals. The U.S dollar index was 0.1% lower at $74.05, recovering from a deeper sell-off Monday morning that added to volatility in the metals. Low volume was also exaggerating price swings, as the London market was closed.

 

The dollar has been suffering recently as investors worry that the U.S. government won't be able to control rising debt and that the currency will continue to lose value.

 

The dollar's recent slide has also prompted China to hint that it may diversify its reserve holdings away from the dollar. According to the state-owned newspaper Xinhuanet.com, the chairman of China Everbright Group, Tang Shuangning, said, "The amount of foreign exchange reserves should be restricted to between $800 billion to $1.3 trillion U.S. dollars." As of February 2011, China lent $1.2 trillion to the U.S. alone.

 

If China reduced its foreign exchange reserves, gold and silver would be leading candidates to take their place.

 

The dollar will also take its cue from Fed chairman Ben Bernanke's press conference Wednesday after the Federal Reserve's two-day FOMC meeting. No policy change is expected, but investors will look for signs as to how the Fed plans to exit its easy-money policy when its second round of quantitative easing winds down in June.

 

Imaru Casanova, an equity research analyst at MLV & Co., says that even if the Fed's loose-money policy ends, it won't necessarily mean a crash in the metals. "Eventually we are going to see higher inflation," Casanova says.

 

Casanova recommends buying gold and silver on weakness, saying that gold could still see a $30 sell-off but that the real value is in gold stocks. The sector hasn't lived up to its 2-to-1 leverage promise, but if gold miners report higher cash flow and better earnings this season, "the market should react to that. . . . (The) stocks aren't looking that expensive."

 

Gold mining stocks, a risky but potentially profitable way to buy gold, were mostly lower Monday.

 

Barrick Gold (ABX) was tumbling 6.1% to $52.25 after the company announced its intent to buy Equinox for 8.15 Canadian dollars a share, an 8% premium based on Thursday's closing price on the Toronto exchange. Barrick was the last big gold miner to resist making an acquisition and had $4 billion in cash at the end of the fourth quarter. The company will report earnings Wednesday.

 

Equinox will give Barrick 100% ownership of the Lumwana copper mine in Zambia and the developing Jabal Sayid copper-gold project in Saudi Arabia. The Lumwana mine has measured, indicated and inferred resources of 905.6 million tons of copper.

 

Barrick plans to produce between 7.6 million and 8 million ounces of gold in 2011 at cash costs of $450-$480 an ounce. More impressively, CEO Aaron Regent wants Barrick to produce 9 million ounces of gold in the next 5 years.

 

The bigger a miner gets, the harder it is to grow, but Lumwana's massive copper reserves will make it cheaper to produce an ounce of gold, using the copper sales to offset the cost. The acquisition also expands its gold concentrates with the Jabal Sayid project.

 

Jim Cramer reacted to the deal on RealMoney.com, maintaining that Barrick Gold is still a blue-chip gold stock. "I don't care that Barrick diversified heavily into some copper with the Equinox bid," Cramer said.

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Other gold stocks were also struggling. Newmont Mining (NEM) was down 1.9% at $58.08, while Randgold Resources (GOLD) was losing 2.3% at $85.23.

 

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