Silver surges as gold settles above $1,500

The yellow metal holds its ground atop new highs, while silver soars 3.6%.

By TheStreet Staff Apr 21, 2011 10:26AM

thestreetGold © Comstock Images/JupiterimagesBy Alix Steel, TheStreet


Updated at 2:28 p.m. ET


Gold prices settled above $1,500 an ounce and silver prices soared Thursday as the dollar weakened and as investors bought the metals ahead of a long holiday weekend in the U.S.


Gold for June delivery added $4.90 to settle at $1,503.80 an ounce at the Comex division of the New York Mercantile Exchange. Gold hit another record, trading as high as $1,509.60, while the spot gold price was up $4.30, according to Ktico's gold index.


Silver prices roared higher, gaining $1.60, or 3.6%, to settle at $46.06 an ounce, pushing the gold-to-silver price ratio down to 32. The ratio lowers when silver rallies faster than gold. David Morgan, the founder of, thinks the ratio could hit 16, while Eric Sprott of Sprott Asset Management says the ratio could hit single digits.


Gold rallied for the fifth straight day as the U.S. dollar index continued to tank, losing 0.8% to $73.80 -- its lowest level since November 2009. It is now trending toward its 2008 level of $72.

A weaker dollar makes dollar-backed commodities like gold and silver cheaper to buy in other currencies, and dollar weakness also highlights the haven appeal of the metals.


Traders are also positioning themselves for a long holiday weekend in the U.S. and might view gold as a good place to store cash. The higher the metals go, however, the more analysts are calling for a correction.


"Given the gains in recent sessions, particularly in gold and silver, . . . there is the risk of deeper corrections across the metals as long liquidation is seen due to the long Easter weekend," predicts James Moore, a research analyst at FastMarkets. "We still expect dips to be viewed as buying opportunities, with gold and silver viewed favorably by investors seeking to hedge against inflation and debt jitters."


In the latest commitment of traders report, silver speculative short positions -- those betting that the metal's price will fall -- grew 12% from April 5 to April 12, the latest data available, while long positions shrank 5%. The longer silver prices stay high, the more traders who are betting against the metal have to buy back their short positions for a loss, which in turn drives prices higher.


Gold saw speculative longs stay flat, while short positions grew 8%.


The medium-term snag for gold and silver will come in June, when the Federal Reserve's second round of quantitative easing, or QE2, is scheduled to end. The Fed meets next week, and while no changes to interest rates are expected, all ears will be listening for hints of tighter or looser monetary policy.


Steve Ayer, a managing director and partner at HighTower's Strata Wealth Management , believes the Fed will have no choice but to continue a loose-money policy by either beginning QE3 or by reinvesting its profits from QE2.


We are "not going to see liquidity go away anytime soon," Ayer argues, despite calls from certain hawkish Fed presidents to raise interest rates to fight inflation. "Bernanke and the doves are certainly not" concerned about inflation, and "they have more sway."


It is generally known that the Fed, like other central banks, is in a bind. Tightening too soon risks cutting off growth, while continuing to pump money into the system can create massive commodity inflation.


Ayer thinks if markets see a QE3, gold will hit $2,000-$2,500 later this year and silver will spike to $75-$80. If the Fed simply reinvests existing funds, he thinks, gold could hit $1,750-$1,800 and silver will go to $60. If the loose-money policy ends, it will be "extraordinarily painful for commodities as well as stocks."


Ayer prefers buying Market Vectors Gold Miners (GDX), Market Vectors Junior Gold Miners (GDXJ) and Global X Silver Miners (SIL) despite the fact that the silver ETF is up only 6% for the year and the gold ETFs have rallied no more than 3%.

"Stocks are undervalued," Ayer says. "They could rally 50%-70% and not be overvalued with respect to their historic ratio of gold. . . . Right now (it is) the most undervalued stock sector in the market. . . . As the sector comes more into vogue . . . it won't really matter the trivial underperformance of one (company) versus another."


Gold mining stocks, a risky but sometimes more profitable way to invest in gold, were rallying Thursday. Barrick Gold (ABX) was gaining 1% to $55.38, and Goldcorp (GG) was adding 1.1% at $55.55.


Newmont Mining (NEM) was rising 0.5% to $59.17 after reporting a solid quarter in which it produced 1.3 million ounces of gold.


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