Gold Prices Could Rise Next Week If Market Holds Support, U.S. Dollar Weakens

16 December 2011, 2:29 p.m.
By Debbie Carlson
Of Kitco News
http://www.kitco.com/

(Kitco News) - Gold prices could rise next week if futures prices can hold support at important technical levels and if the U.S. dollar’s recent rally slows or falters.

Prices fell on the week, but rose on Friday; most market watchers attributed the gain to short covering ahead of the weekend. The most-active February gold contract on the Comex division of the New York Mercantile Exchange settled at $1597.90, down 6.9% on the week. March silver settled at $29.671, down 8% on the week.

In the Kitco News Gold Survey, out of 31 participants, 22 responded this week. Of those 22 participants, 14 see prices up, while eight see prices down, and zero see prices sideways or unchanged. Market participants include bullion dealers, investment banks, futures traders and technical chart analysts.

Several market watchers said the $1,560 area, followed by the $1,530 area, are two very important technical chart points for gold to hold above next week if it is to consolidate this week’s break. Thursday’s low was $1,562.50 for the February contract and $1,534.80 is the September low, based on continuation charts.



Phillip Streible, senior market strategist, R.J. O’Brien, said he’d feel more comfortable about gold’s upside potential if the market could close above $1,607.

“If we could do that, we could start a leg up, but there are so many levels of resistance it’s not even funny,” he said.


Other technical analysts said given that gold gave up nearly $200 an ounce in a swift rout, the market has entered oversold status and can see a modest bounce for that reason. Upside limits for gold next week are around $1,640, they said.


Charles Nedoss, senior market strategist at Olympus Futures, said the action of the U.S. dollar index will be important to gold. If the dollar pulls back, that will give gold – and other commodities – more room to rise.

WATCH PHYSICAL, ETF DEMAND


Market participants are keeping a close eye on two important factors in determining gold’s price near-term: physical demand and exchange-traded fund flows.


According to some sources, physical demand in Asia, most notably India and China, has been lighter than expected so far, given the sizable price break. For India, part of that is because gold priced in rupees has made the metal more costly than usual, but in the past day or so that cost has retreated slightly. Barclays Capital noted a slight pickup in demand in those countries, but at lighter volume.


Peter Thomas, director of business development, PGFBest Precious Metals in Chicago, said the price break in precious metals has rekindled interest in buying bullion from his firm.

“It’s been insane. I’ve written more orders in the past two days that I have all month,” he said.


That’s in contrast to a few weeks ago when he said there was very little interest across the board.

Thomas said he’s seen a mix of business, both new customers and old. Business has also come from different aspects of the sector, from producers and dealers needing to hedge to retail customers looking to buy commemorative gift coins and then asking about bullion products.


“It seems like prices came down enough to where people came out of the woodwork,” he said, noting there’s been an even mix of gold and silver bullion, along with a mix of Canadian and American pieces sold.

Furthermore, he said, there’s been strong interest in buying product for U.S. retirement accounts like 401(k)s and IRAs. Despite the price drop, premiums are remaining at levels of about 5% on gold and 9% to 9.5% on silver, he added.


Market participants are also keeping an eye on exchange-traded fund flows. Until Thursday, holdings at the major physically backed ETFs were at record highs. That changed when new data showed nearly 15 metric tons of gold flowed out of the ETFs, with the majority coming from the largest product, SPDR Gold Trust (GLD).


Commerzbank analysts said they don’t believe the heavy outflows from ETFs are a sign of what’s to come. Rather, they believe the recent low price is an “attractive opportunity to buy gold.”


James Steel, precious metals analyst at HSBC, said one positive sign for bullion prices is a recovery in the gold-implied lease rates to minus 0.30% from a year-to-date low of minus 0.57% on Dec. 6. “Higher lease rates indicate a reduction in gold lending and hence gold liquidity. We believe the recent steep decline in gold lease rates stems from the need by European institutions to raise U.S. dollar funding,” he said.


While these factors are supportive for gold overall, that doesn’t necessarily mean prices will automatically rise next week and into the year-end, he said. Next week is the last full trading week of the year, so volume is likely to start to slow down significantly as each day moves closer to the Christmas holiday. In the U.S. Christmas will be observed on Dec. 26, when the exchanges and government are closed.


Steel said prices could continue to be under pressure because of end-of-year liquidation and book-squaring by hedge funds and money managers, and weakness in oil and other commodities. Declining trading volume could mean steep price swings. Steel also said, as other bank analysts have mentioned, that recent emerging market buying has been very light.


SILVER ATTRACTIVELY PRICED UNDER $30


Streible said silver’s price under $30 is a good buy. “Being able to buy silver under $30 is a gift,” he said.

There seems to be a little lack of interest so far, though, and he attributed that to silver being fairly range-bound recently between $32 and $34.


Nedoss said silver’s action will largely be determined by where gold goes.

By Debbie Carlson of Kitco News dcarlson@kitco.com