Gold, silver extend losing streak
The precious metals continue their downward slide on reports that large hedge funds are selling off gold and silver positions.
By Alix Steel, TheStreet
Updated at 2:20 p.m. ET
Gold (-GC) for June delivery lost $25.10, or 1.6%, to settle at $1,515.30 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded between $1,543.50 and $1,505.50 on heavy volume. The spot gold price was down $24.40, according to Kitco's gold index.
Silver (-SI) prices lost 7.5% for the second consecutive session, falling $3.20 to settle at $39.39 and taking out the $40 support level. The U.S. dollar index was losing 0.1% to $73.07, reversing steeper losses after the services sector contracted in April.
A weaker U.S. dollar and news of an official $116 billion bailout of Portugal weren't enough to buoy gold and silver. Prices were also under pressure after a report in the Wall Street Journal said that George Soros's hedge fund, a firm operated by investor John Burbank and some other leading firms have been selling gold and silver.
Silver has tanked more than 20% from its high last week of $49.82, almost wiping out April's gains, led in part by oversold conditions and three margin hikes by the CME as the futures market tried to handle the volatility.
"The reason why the exchanges and clearing houses are raising their rates is because of these violent moves we have been having in silver, anywhere from 5%-10% moves on a daily overnight basis," says Anthony Neglia, the president of Tower Trading, who says the hikes are not affecting his silver positions.
Neglia likes silver above $42 and still believes the metal will hit $50, but said he would get bearish below $40. He said, "$38 is your next level, because that is where this whole move started from."
Gold, on the other hand, is a deeper and more liquid market, which helps it absorb volatility better. Mihir Dange, a trader at Arbitrage, thinks that margin hikes won't hit the gold market. Dange is still bullish on the metal, thinking it can hit $1,600 in 2011.
"If you're playing the macro picture, you can buy dips and hold," he said. Dange is selling into strength to book profits.
Dange says that if gold holds steady below $1,520, then it could sink to $1,500, and that around $1,515 he would be a long-term buyer. If gold breaches $1,477 an ounce, Dange says, he would bet against the metal.
Adrian Ash, the head of research at BullionVault.com, notes that "since the close of London trade last week, wholesale silver is down 10.5%, but gold is up at new record highs. Gold up, silver down is a very rare event -- less than 14% of all trading days since 1968."
There are two events this week that will provide direction for the precious metals: the European Central Bank meeting Thursday, and Friday's U.S. jobs number. The ECB raised rates at its last meeting in April by 25 basis points, and it is unlikely to do so again at the next meeting. Some experts are looking at July for the next hike.
Neglia, however, seems pretty convinced the ECB will raise rates to fight inflation that is now at 2.7%. He thinks traders are looking to "flatten out" their silver positions ahead of the move, which could have contributed to silver's recent dramatic sell-off.
Dange thinks Friday's jobs number will be more significant for gold prices, arguing that even if the ECB raises rates, the Federal Reserve has made it clear it won't until at least the fall.
The U.S. unemployment rate is expected to rise to 8.9%, according to Briefing.com, while the private sector is expected to have added 200,000 jobs. The number of people filing for unemployment benefits for the first time has been rising in recent weeks over the pivotal 400,000 level, which could put a crimp in a better jobs picture. Initial claims are a leading indicator, while the jobs number is a lagging indicator.
If the number beats expectations, gold and silver could sell off, as the Fed might be prompted to reduce its balance sheet or talk more seriously about raising rates. If the jobs picture remains weak, investors can be assured that the Fed's loose-money will continue for at least the next five months, and some may even talk of another round of quantitative easing.
Gold mining stocks have yet to see the benefit of higher gold prices. Out of the 12 stocks in the CBOE Gold Index (GOX), down almost 4% year to date, only three have positive returns for the year: Harmony Gold (HMY), Iamgold (IAG) and Goldcorp (GG), which reports earnings after the close Wednesday.
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