Gold, silver slip as dollar strengthens

The yellow metal settled lower as a stronger US currency weighed on prices, but not before it set another intraday record as uncertainty reigned over the debt ceiling.

By TheStreet Staff Jul 27, 2011 11:48AM

Gold © Comstock Images/Jupiterimagesthe streetBy Alix Steel, TheStreet


Updated at 3:45 p.m. ET


Gold prices touched record highs Wednesday after House Speaker John Boehner's debt plan hit a brick wall, but prices pared earlier gains as the U.S. dollar strengthened.


Gold (-GC) for August delivery slipped $1.70 to settle at $1,615.10 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,628.80, an intraday record, and as low as $1,608.90, while the spot gold price was last down $5, according to Kitco's gold index.


Silver (-SI) prices dipped 13 cents to close at $40.57 an ounce. The U.S. dollar index was adding 0.8% at $74.07, while the euro was shedding 1% against the dollar.


The House of Representatives had been gearing up to vote on Boehner's debt plan, whereby the debt ceiling would be raised in two tranches based on spending cuts, but the plan hit a snag. The Congressional Budget Office said the plan to cut $1.2 trillion over 10 years fell almost $400 billion short. The CBO then reviewed the Senate Democrats' plan and found it "would reduce budget deficits by about $2.2 trillion," as opposed to the $2.7 trillion in proposed savings.

Uncertainty over an agreement gave investors a green light to buy gold, and prices reached new highs early Wednesday. But with the Dow Jones Industrial Average ($INDU) tumbling nearly 200 points as concerns over a U.S. default -- or at least a debt downgrade -- persisted, some investors may have been forced to sell their gold positions to cover losses elsewhere.


David Banister, the chief investment strategist at, thinks gold will hit $1,730 in a few weeks and maybe even soar to $1,800. Banister doesn't think the U.S. will default but thinks global fiscal issues and negative real interest rates -- the interest rate minus inflation -- will continue to support high gold prices.


"Any reaction to the downside on gold will be temporary," Banister argues. "Traders might be unwilling to make a commitment until they see the short-term reaction," explaining why gold hasn't skyrocketed, "but I would say any short-term pullback in gold on successful debt talks I would be a buyer."


Stan Dash, the vice president of applied technical analysis at TradeStation, also sees prices heading to $1,730. Dash, in measuring rallies since gold's low in October of 2008, says gold can typically move 20% in a leg of a bull market. A move to $1,730 would be a 17% rise from the May support level of $1,480 an ounce. "You can't argue with price," Dash says. "It's making new highs. It's still a bull market."


The question is what happens if and when gold hits $1,730. The fourth quarter is seasonally a strong buying period for gold as India enters its wedding season and purchases jewelry. In the third quarter of 2010, gold rallied 5% and then 7% in the next quarter. Already in July 2011, gold has popped 8%, which is why many traders feel prices might be overextended.

"Regardless if (a debt deal) gets done by Aug. 2, we should see some type of sell-off," says Mihir Dange, a co-founder of Arbitrage.


Dash does have some concerns in his bullish analysis: the gold-to-S&P ratio is 1.2 -- that is, the gold price divided by the S&P. This area "has been a topping area since July 2010. . . . We poked up in that area a few months ago" and then sold off. Dash also says his interim target was $1,628, a level that was close to being taken out Wednesday, which might prompt some traders to sell some long positions. "It's a yellow-light area."


Gold mining stocks were falling along with broader equities Wednesday. Barrick Gold (ABX) was down 2.4% to $48.65, while Newmont Mining (NEM) was off 1.8% at $57.32. Kinross Gold (KGC) was sinking 3.7% to $16.71, and Agnico-Eagle (AEM) was falling 3.6% to $60.23.


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