Gold, silver climb on inflation

The metals break higher as prices in the UK and China continue to rise. JP Morgan sold 4.5 million shares in gold ETFs in the fourth quarter while investing more heavily in silver.

By TheStreet Staff Feb 15, 2011 11:22AM

Gold © Comstock Images/JupiterimagesthestreetBy Alix Steel, TheStreet


Updated at 4:46 p.m. ET


Gold and silver prices rose Tuesday on a weaker dollar and mixed inflation news out of China and the U.K.


Gold for April delivery added $9 to settle at $1,374.10 an ounce at the Comex division of the New York Mercantile Exchange. Gold today touched a high of $1,377.50, a key resistance area, and a low of $1,361.30. The spot gold price was adding more than $11, according to Kitco's gold index.


Silver prices climbed 16 cents to $30.70 an ounce, breaking through their $30.50 resistance area.


Inflation and weak January sales weighed on stocks. The Dow Jones industrials ($INDU) closed down 42 points to 12,227, the S&P 500 ($INX) finished off 4 points at 1,328 and the Nasdaq ($COMPX) fell 13 points to 2,804.


Inflation data was leading the precious metals higher Tuesday. The U.K. reported that January's Consumer Price Index rose 4% from 3.7% in December. China reported an inflation reading of 4.9%, higher than December’s level of 4.6% but lower than the expected 5.4%.

The higher number in the U.K. means the central bank might be coerced into raising key interest rates, but the Bank of England has adamantly shied away from that course of action for fear of choking off growth. The country grew negative 0.5% in the fourth-quarter.


A strong reading in China will also perpetuate negative real interest rates in the country, which are currently -1.9%. On the flip side, because the number wasn't as high as some analysts expected, the People's Bank of China might not be forced to raise interest rates as aggressively, something it hates doing but has felt compelled to do three times since October.


Gold and silver thrive in negative real interest rate environments, as the local currency is worth less and the precious metals become a more appealing place to store wealth.


Gold has also shrugged off attempts by other countries to fight inflation, largely ignoring Sweden's 25 basis point interest rate hike Tuesday.


A weaker dollar was also helping silver and gold, with the U.S. dollar index down 0.2% to $78.46. The euro was rising 0.2% to $1.35 against the dollar after Spain raised €6.17 billion in an auction of 12-month and 18-month bonds, both at significantly lower interest rates due to strong demand.


Technical trading was also influencing the market. Silver has closed above the $30 level four times in the past week, which is a very bullish signal for traders. "I think silver prices look fantastic," said Phil Streible, senior market strategist at Lind-Waldock. Silver broke through the small resistance area of $30.50, which is bringing momentum traders into the market.


As for gold, prices still have more to prove. Streible says "$1,377-$1,378 is still the upper end of the range. I think that's been a challenge for gold for a couple of weeks now and really it's going to take a close over there [for gold to really move higher]." After a strong close, Streible says, gold could challenge the $1,400 level.


Gold and silver bugs will also be looking to 13F filings, which were released today and highlight who and how big-named investors and investment banks are trading precious metals in the fourth quarter.


The biggest news was that JPMorgan Chase (JPM) sold 4.5 million shares of gold ETFs, dumping 1 million shares from the SPDR Gold Shares (GLD) and 3.5 million from the iShares Gold Trust (IAU). The investment bank rotated more heavily into silver, buying 2.4 million shares of the iShares Silver Trust (SLV) for a total of 3.6 million shares. JPMorgan does have a small position in the ETFS Physical Gold (SGOL) of 400,748 shares.

Hedge funds run by John Paulson and George Soros are always closely watched. Paulson is still the largest holder of the GLD with 31.5 million shares, while Soros is the seventh with 4.7 million shares. The GLD is the biggest position in both of their portfolios.


This kind of loyalty to gold can give confidence to gold investors who not only want to invest like the behemoths but also want validation for their holdings.


Paulson sold a handful of shares of AngoldGold Ashanti (AU) but is still the company’s largest shareholder. Paulson stood pat with shares of Gold Fields (GFI), NovaGold (NG), Randgold Resources (GOLD) and Iamgold (IAG), but did sell 13.7 million shares of Kinross Gold (KGC).


Soros was a little more active in the gold market, closing out positions in several junior gold stocks: Seabridge (SA), Gammon Gold (GRS), and New Gold (NGD). Soros still owns NovaGold (NG), unchanged at 12.91 million shares, while adding 98,500 shares of Kinross Gold (KGC).


Gold mining stocks, a risky but potentially profitable way to buy gold, rallied Tuesday. Barrick Gold (ABX) rose 1.4% to $49.19 while Newmont Mining (NEM) added 1.5% to close at $58.04. Agnico-Eagle (AEM) gained 2.8% to $75.53 and AngloGold Ashanti finished 1.9% higher at $45.91.


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