Gold, silver soar on inflation worries

Silver jumps more than 3% and gold hits records as investors seek protection.

By TheStreet Staff Apr 28, 2011 10:07AM

Gold © Comstock Images/Jupiterimagesthe streetBy Alix Steel, TheStreet

 

Updated at 4:28 p.m. ET

 

Gold prices settled at new highs and silver prices soared Thursday as investors bought the metals against a weak dollar and higher inflation expectations.

 

Gold (-GC) for June delivery surged $14.10 to $1,531.20 an ounce at the Comex division of the New York Mercantile Exchange. Gold futures hit a record intraday level of $1,538.80 an ounce while the spot gold price was less aggressive, adding $6.70, according to Kitco's gold index.

 

Silver (-SI) prices soared $1.55, or more than 3%, to settle at $47.54 an ounce. Prices traded as high as $49.56 Thursday, just shy of their recent intra-day high of $49.82. The U.S. dollar index was slipping 0.3% to $73.13.

 

Stocks rallied late to post modest gains, as the Dow Jones Industrial Average ($INDU) closed up 72 points to 12,765. The S&P 500 ($INX) added 5 points to 1,360, and the Nasdaq ($COMPX) gained 3 points to 2,872.

 

Thursday's rally was carry over from Wednesday, when gold and silver popped 1% and 2%, respectively, and rose even higher in after-hours trading. Federal Reserve Chairman Ben Bernanke can be thanked for the rally. The unanimous decision by the Fed to keep interest rates at 0-0.25% until at least the fall and to keep its balance sheet the same size after quantitative easing ends in June means cheap money will stay in the system for the medium term.

The Fed will reinvest its profits from its current $600 billion bond-buying program back into the market not adding extra cash but not taking any out either. Inflation forecasts were also below the Fed's 2% target, which means the central bank would like to see more inflation. Some experts are calling this “QE 2.5,” saying that this leaves the door open to a third round of quantitative easing, or QE 3.

 

This is "adding quite a bit of pressure to the dollar index and investors are going to be searching for those hard assets to protect themselves," says Phil Streible, senior market strategist at Lind-Waldock. "(I am looking) at the long side of both (gold and silver)." Streible would be buying if gold sunk to the $1,505-$1,510 level and if silver falls south of $46.

 

Those levels look hard to reach with the metals taking off after the Labor Department said first-time claims for unemployment last week rose more than expected. The Fed has said it wants the unemployment rate, currently at 8.8%, to fall to 8%, which will be hard to do as jobless claims rise.

 

Streible says the rally was even stronger because speculators who were washed out in the recent selloff could get back into the market as well as those who missed the rally the first time. His forecast for 2011 is $1,650 for gold and $60 for silver.

 

It's not just the U.S. The bank of Japan left interest rates unchanged at its latest central bank policy meeting and lowered growth forecasts estimating a recession. On the flip side, the IMF has said that Asia needs to tighten more and faster to fight rising inflation. This balancing act escalates the likelihood of negative real interest rates, at least for the medium-term.

 

"The prospect of low interest rates and higher inflation expectations in the U.S., coupled with ongoing issues such as increasing Eurozone debt concern and (Middle East-North Africa) unrest continue to create a bullish environment for bullion as investors look to hedge against negative real-interest rates and rising inflation," says James Moore, research analyst at FastMarkets.com.

 

The recent rally doesn't make gold and silver any less crowded, however, meaning that there are a lot more people in the market who could sell or take profits, especially in silver.

Monday on the Comex, trading of silver futures popped to a record 319,204 contracts. Adding to potential volatility is the end of April, where traders must either roll over their existing contracts or let them expire. This could also account for the price discrepancy between the futures market and spot (physical) market.

 

Gold mining stocks, a risky but potentially profitable way to buy gold, closed mostly lower Thursday. Barrick Gold (ABX) fell 0.2% to $50.72, and Newmont Mining (NEM) slipped 0.3% to finish at $58.79. Kinross Gold (KGC) gained 0.1% to $15.69.

 

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2Comments
avatar
With the Stock market potentially stagnating for the next quarter or so, the Fed should have raised the interest rates a quarter point.   By doing so now, the stagnating market would have cushioned the blow somewhat.   By next Fall when the market rallies back, the interest rate hike would have been forgotten.
Apr 28, 2011 1:27PM
avatar
Can you say "bubble"?

Last time I looked groceries, beans and bullets aren't priced in ounces of silver or gold.

How does one make change for a gold bar?

That said, I did buy on ebay about 50 ounces of silver when it was less than $10.

But I'm not running off to cash it in.  It is for emergencies only.  Gold and silver sellers are raking in the cash.  Sky is falling!

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