Traders wade back into gold, silver

Prices continue their modest rebound as sovereign debt fears and currency drama spark interest in the haven assets.

By TheStreet Staff May 10, 2011 10:19AM

Gold © Comstock Images/Jupiterimagesthe streetBy Alix Steel, TheStreet


Updated at 4:22 p.m. ET


Gold and silver prices climbed Tuesday despite a firmer U.S. dollar as haven buying resumed.


Gold (-GC) for June delivery added $13.70 at $1,516.90 at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,519.30 and as low as $1,505.20. The spot gold price was rising $2.90, according to Kitco's gold index.


Silver (-SI) prices continued to make a modest recovery from last week's drubbing, adding $1.37 to close at $38.49. The iShares Silver Trust (SLV) added 311 tons Monday -- almost half of what it shed last week.


Stocks climbed after Microsoft (MSFT) announced it would buy online phone service Skype for $8.5 billion. The Dow Jones Industrial Average ($INDU) closed up 76 points to 12,760, the S&P 500 ($INX) gained 11 points to 1,357, and the Nasdaq ($COMPX) finished up 29 points at 2,872.

The rally in gold and silver may point to sovereign debt fears or to worries that Greece will likely have to default on its debt in some way -- perhaps taking more time to pay back existing loans -- as its economy is crippled by austerity measures. Monday's downgrade of long- and short-term Greek debt from Standard & Poor's has again underlined the instability of the euro. Any currency drama is typically good for gold and silver, as they become appealing as safer assets.

Haven demand was enough to offset a stronger dollar. The U.S. dollar index was adding 0.1% to $74.78 and could see more strength if the euro continues to weaken.


Both metals suffered steep losses last week and quickly transitioned from overbought to oversold, prompting a snap-back rally in which traders took advantage of lower prices.


Some analysts, however, are skeptical of higher prices. James Moore, a research analyst at FastMarkets, keeps warning of more selling phases, and Adrian Ash, the head of research at, said, "Either silver was a raging buy below $35 on Friday or Mr. Market's got lots more pain lined up for silver investors buying back in."


Brian Booth, a senior market strategist at Lind-Waldock, thinks silver will continue to see consolidation between $30 and $38.


"I think that that area would be a great area, with the new margin requirements, for traders to look to some sort of a day trade or swing trade if possible," Booth said.


One big red flag for higher gold prices, however, is the possibility that higher margins will smack the commodity as it did silver last week and oil this week. The amount of money required to trade a 5,000-ounce silver contract increased by 85%. The CME struck commodities again Tuesday as margin requirements for oil rose 25%.


Booth said if gold hits record highs again, the CME could step in to protect against volatility and "profit-taking may ensue." Booth is watching currencies to find direction in the gold market, where he is long gold at $1,500 but is ready to rethink his position on any whisper of a margin hike.


"All eyes will be on gold over the next few weeks. . . . This is mid-year, when . . . hedge funds and traders alike will be looking for opportunities to book gains in these bullish markets," he said.


Gold and silver will also take their cue from a slew of inflation data set to be released this week. China will report April's inflation reading Wednesday, and either way the result could help gold. Consumer prices rose 4% in March, down from 4.4% in February, and the People's Bank of China has implemented rate hikes and higher reserve requirements, which require banks to keep more money in their coffers in an effort to tame inflation.


A higher reading could prompt more hikes but boost gold as investors bet on hard assets versus the central bank's ability to curb prices. Gold has ignored previous rate hikes. A weaker reading could signal an end to rate hikes, which could also be good for gold, since negative real interest rates would persist, currently at negative 0.75%.

The same might be said for the U.S. when it reports its Consumer Price Index for April on Friday. Core inflation was 1.1% in March, while overall inflation, including energy and food, was at 2.1%. Many observers argue, though, that the number is actually higher than reported.


Gold mining stocks closed mostly lower Tuesday. Barrick Gold (ABX) ended down slightly at $47.65, while Newmont Mining (NEM) slipped 0.1% to $54.65. Goldcorp (GG) was off 1% at $49.68, and AngloGold Ashanti (AU) shed 2% to finish at $45.48.


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