Gold, silver shine on weak dollar, European debt

Prices rally as investors seek protection amid mounting sovereign debt concerns in Greece, Italy, Spain and Portugal.

By TheStreet Staff May 24, 2011 11:27AM

Gold © Comstock Images/Jupiterimagesthe streetBy Alix Steel, TheStreet


Updated at 2:15 p.m. ET


Gold and silver prices shined as haven assets Tuesday as European debt worries plagued investor sentiment.


Gold (-GC) for June delivery added $7.90 to settle at $1,523.30 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,529 and as low as $1,513.20. The spot gold price was up $6.90, according to Kitco's gold index.


Silver (-SI) prices gained $1.22 to finish at $36.13 an ounce. The U.S. dollar index was shedding 0.3% at $75.91, which helped the metals as they became cheaper to buy in other currencies.


European woes were front and center Tuesday. European countries have reportedly been preparing for a Greek default that would result in delayed repayments. Moody's is also threatening to downgrade the credit rating of some of the U.K.'s biggest banks.

Long-term borrowing costs for Italy, Portugal and Spain jumped Monday as investors were reluctant to lend money to the troubled countries. Portugal is in bailout mode, Italy received a credit downgrade and Spain has a new ruling party that could derail its own austerity measures or uncover more debt problems.


Goldman Sachs (GS) also might have called a bottom in commodities, after it revised its outlook upwards for oil. However, its gold and silver price targets were unchanged at $1,690 and $28.20, respectively. Morgan Stanley (MS) increased its oil price forecast by 20%.


A wild card for all commodities, particularly gold, is growth in China. Goldman slashed China's 2011 and 2012 growth forecasts to 9.4% and 9.2%, respectively. If the country slows too much there won't be enough money to buy goods, from commodities the country actually consumes to gold, which is bought as a store of wealth. Goldman said China's inflation, currently at 5.3%, will fall to 4.7% in 2011 and to 3% in 2012.


Slowing inflation would prevent the central bank from raising interest rates, which would be good for gold, but could also diminish gold's attractiveness as a haven investment.


Jeff Clark, senior precious metals analyst at Casey Research, thinks that China will be forced to buy loads of gold and silver. Clark thinks that later in this decade the IMF will introduce a basket of currencies which will become the world's official reserve currency as the value of the dollar fizzles out. "After that, it would be the yuan."


Clark doesn't believe in a Chinese gold standard but does think the country will keep buying the precious metals to beef up its purchasing power and at some point will ditch dollars. "China is trying to diversify their way out . . . (by) buying gold and buying all their own production (of gold)." Clark thinks silver might hit its inflation-adjusted high of $120, but that gold could actually break $5,000 an ounce.


Short term, however, Clark sees more downside for gold. "The average correction for silver is 19%, gold's 12% and we've only had a 3%-4.5% correction in gold . . . It could easily fall further." Silver has corrected more than 30%, above Clark's estimated average.

Clark thinks the end of the bull market is at least three years out and that the "real issue is where is the bottom of the dollar." Although the dollar and gold only move inversely 32% of the time, according to Standard & Poor's, many experts believe gold's bull market since 2008 is primarily due to currency debasement, triggered when central banks printed their way out of the financial crisis, and that investors are opting for gold as protection against weakening paper money.


Gold mining stocks were rallying Tuesday. Barrick Gold (ABX) was up 2.2% to $46.53, and Newmont Mining (NEM) was gaining 1.7% to $55.20. Goldcorp (GG) was rallying 2.2% to $49.51, and AngloGold Ashanti (AU) was adding 1.5% at $45.15.


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