Gold, silver rebound from sell-off

By Alix Steel, TheStreet

 

Updated at 3:57 p.m. ET

 

Gold and silver prices regained some momentum Wednesday on strong physical buying as investors took advantage of recent sell-offs.

 

Gold for June delivery settled up $2 at $1,455.60 an ounce at the Comex division of the New York Mercantile Exchange. Gold climbed as high as $1,463.70. The spot gold price was adding $3.80, according to Kitco's gold index.

 

Silver prices added 17 cents to settle at $40.24 an ounce.

 

Gold prices had fallen 1.3% this week as broad selling struck the commodities sector, but the metal rebounded slightly Wednesday as investors stepped in to buy gold at a "discount."

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"Whenever we see a little sell-off in the gold market, what's historically followed is some physical buying, which has propped up the price," says Will Rhind, the head of U.S. operations for ETF Securities. Rhind still thinks that gold prices could hit $1,500 but that investors will have to be patient.

 

"I like the range between $1,400-$1,450," says Mihir Dange, a trader at Arbitrage, adding that on the upper end gold could trade around $1,460 an ounce. "There seems to be a lot of strife around the world, inflation concerns and gold still can't seem to rally . . . so right now I would trade a little neutral to bearish."

 

Dange doesn't think $1,500 is off the table but says gold should have already broken that level on recent catalysts.

 

The U.S. dollar index was up 0.14% after President Barack Obama outlined an ambitious budget plan in a speech Wednesday calling for $4 trillion in cuts over 12 years. Gold kept rising tentatively after the Federal Reserve released its beige book report that indicated the economy was improving across the country. Gold will also look to Friday's inflation readings out of the U.S. and China for direction.

 

The Federal Reserve is expected to keep rates low, but China could take more steps to tighten its money supply, making Friday's inflation reading key to policy initiatives. The Chinese state-run newspaper reported Wednesday that China will "earnestly implement its 'prudent' monetary policy," ranging from rate hikes to higher reserve requirements.

 

To bullish gold investors, central banks will need to raise rates aggressively to dent the bull market in gold.

 

Peter Schiff, the president of Euro Pacific, asks, "What's going to stop this gold bull market?" Schiff says that if the inflation rate rises faster than interest rates, then "it won't really matter to gold . . . gold will keep rising."

 

Schiff says the "real inflation rate is closer to 10% than 2%. . . . It's as bad as the 1970s . . . and it's going to get worse." When asked about gold's recent sell-off as being a bearish indicator, Schiff conceded that gold will see big corrections, perhaps as big as 10%, which would pull gold down to $1,300, but that "the gold bull market will continue for a long time."

 

The GFMS, an independent research consultancy, predicts that gold prices will hit $1,600 before the end of the year.

 

"Investors continue to be concerned about the outlook for inflation, with governments in general showing little appetite to tighten monetary policy significantly," says chairman Philip Klapwijk. GFMS' recent gold survey said investment demand drove gold higher in 2010 and should do so in 2011, along with increasing jewelry demand, as buyers become used to higher prices.

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World mine supply pushed the global gold total to a record high, with the above-ground supply estimated at 165,600 metric tons, according to the World Gold Council, but investment demand sopped up the extra supply.

 

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

 

Barrick Gold (ABX) was down 0.5% at $52.09, AngloGold Ashanti (AU) was off 0.2% to $48.85, and Newmont Mining (NEM) was slipping 1.6% to $56.32. Eldorado Gold (EGO) was gaining 2.1% to $17.72.

 

Broader equities were struggling to hold gains near the closing bell, with the Dow Jones Industrial Average ($INDU) up 6 points to 12,269. The S&P 500 ($INX) was up less than a point to 1,314, and the Nasdaq ($COMPX) was up 16 points to 2,761.

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