Gold gains, silver slides on Europe woes

As debt worries weigh on the euro, the yellow metal's relative strength amid a surging dollar may cheer bulls.

By TheStreet Staff May 23, 2011 11:08AM

Gold © Comstock Images/Jupiterimagesthe streetBy Alix Steel, TheStreet


Updated at 3:44 p.m. ET


Gold made modest gains while silver prices faltered Monday as concerns over European sovereign debt fueled a rally in the U.S. dollar.


Gold (-GC) for June delivery added $6.50 to settle at $1,515.40 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,519 on strong overnight buying but then hit a low of $1,503.70. The spot gold price was up $2.70, according to Kitco's gold index.


Silver (-SI) prices lost 18 cents to finish at $34.90 an ounce. The U.S. dollar index was surging 0.9% to $76.12 as the euro tanked against the dollar. In euro terms, gold prices were rising 1%.


Gold prices eked out a gain Monday despite a strong dollar as investors opted for the haven asset in light of ballooning sovereign debt worries out of the eurozone. Standard & Poor's slashed Italy's debt rating from stable to negative, while the ruling Socialist Party lost big in Spain to conservatives. Although the Spanish prime minister said he would stay in power, the election underscores the economic frailty of the country and the loss of investor confidence in the eurozone as a whole. Fitch downgraded Belguim's outlook to negative from stable in mid-day trading.

If history repeats itself, gold could find further support. In fact, its relative strength in the face of a big dollar rally might cheer investors who remain bullish on the yellow metal.


The first quarter of 2010 saw the rumblings of problems in Greece, with gold falling 0.3% and the CurrencyShares Euro Trust (FXE), which tracks the euro, sliding 6.4%. In the second quarter of 2010, Greece's debt was downgraded and the country received a bailout package. Gold rallied 11.4%, while the FXE tanked 10.1%. So far in second quarter 2011, gold is up 5.3% and the FXE is down 0.4%. If the euro has more room to fall, gold might have more room to rally.


Throwing a wrench into gold's rally Monday were preliminary reports that manufacturing activity in China, Germany and the EU has slowed in May. Investors have become increasingly concerned that China's government will constrict the money supply to fight inflation to such an extent that it stunts growth.


As China has outpaced India in terms of gold demand, higher gold prices rely on consistent and strong demand from the country.


Craig Weynand, the chief operating officer of NuWave Investment Management, is pessimistic on short-term gold and silver prices, that all commodities have been in a bubble for some time now.


"Going forward longer term for commodity prices, we think that prices will generally continue higher," he said. "But in the short term, there will be corrective activity." Weynand says markets are entering a soft patch that will weaken commodities and give investors less impetus to buy gold and silver as an inflation hedge.


Weynard anticipates a 10% correction in stocks and commodities, a much more conservative estimate than that of Mark Arbeter, the chief technical strategist at Standard & Poor's, who is calling for a 20% correction in the S&P.


"I think the dollar put in an intermediate, if not longer-term, bottom," says Arbeter, explaining his primary reason for being so bearish on commodities and stocks. "We saw extreme bearish sentiment . . . when the dollar was around the $72, $73 level. We've rallied very quickly up to the $75-and-change level. While we might pull back, I don't see a retest of the recent lows."


Gold and silver tend to do well when the dollar is weak as the dollar-backed commodities become cheaper to buy in other currencies and as the metals become an attractive alternative to paper money.


Jim Cramer wrote on that investors should consider gold a currency, not a commodity. "Once you think of it that way, you will no longer have to trade the yellow stuff. Considering what's going on in the world, you will just own some," Cramer said.

Gold mining stocks were mostly lower Monday along with broader equities. Barrick Gold (ABX) was down 0.6% at $45.34 and Goldcorp (GG) was shedding 0.7% at $48.34, while Newmont Mining (NEM) was gaining 0.2% at $54.19. Barron's highlighted all three stocks over the weekend as undervalued shares poised to rally on high gold prices and strong production growth.  


AngloGold Ashanti (AU) was down 3% to $44.45, and Rangold Resources (GOLD) was falling 2.1% to $76.21.


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