Silver may outperform gold in near term

Published January 29th, 2012 - 09:05 GMT
Michael Lewis would expect that silver prices could outperform gold in the near term
Michael Lewis would expect that silver prices could outperform gold in the near term

Gold could build on its rally into next week and possibly close out the month of January with a gain market participants said. Countries that celebrate the Lunar New Year such as China will return to work next week and others said that momentum that started following the dovish statement by the Federal Open Market Committee on its long term interest rate outlook will likely continue.

Still some market watchers said given the nearly one way move in commodity prices in general gold and other markets could be due for a corrective pullback which would mean lower values. Prices rose on Friday and on the week. The most active April gold contract on the Comex division of the New York Mercantile Exchange settled at $1,735.40 an ounce up 4.12% on the week.

March silver settled at $33.790 an ounce up 6.68% on the week. In the Kitco News Gold Survey out of 32 participants 25 responded this week. Of those 25 participants 19 see prices up while six see prices down and none are neutral on prices. Market participants include bullion dealers investment banks futures traders money managers and technical chart analysts. Richard Baker editor of the Eureka Miner Report said gold prices could rise next week and possibly touch $1,750 after the FOMC meeting and Friday's fourth quarter gross domestic product report. It creates a favorable environment for gold and commodities going forward. Gold value with respect to key commodities oil copper and silver has been falling since October but its descent is showing signs of slowing. It is likely that this pause is temporary and a bullish price environment could develop for all four in the near term he said.

George Gero vice president global futures and precious metals strategist at RBC Capital Markets said although the market saw some selling ahead of the weekend Friday he expects gold prices to rise next week. He said first notice day for the Comex February gold contract is Tuesday so for those market participants who do not want to take or make delivery they are either exiting positions or rolling those to farther dated contracts. Gero said while the majority of the positions are going into the most active April contract some are going into the June contract while others are rolling positions as far out as the December 2012 and December 2013 contracts. That s a bullish sign for gold as it suggests confidence that prices will rise in the future he said. Gold is continuing to find favor with technical traders. Open interest is up momentum is up. We are looking for China to return to the market next week and the central banks have been buying Gero said.

Other Markets Rise

In addition to gold's rally this week silver and the platinum group metals have been rising. Michael Lewis research analyst at Deutsche Bank noted that the FOMC meeting was not only positive for gold but it also gave silver a lift. We would expect that silver prices could outperform gold in the near term. Longer term we expect that the persistence of negative real interest rates will sustain the appeal of holding precious metals he said. Gero said the spread between platinum and gold has been narrowing and he expects that to continue. The price premium gold has held over platinum was as much as $180 to $200 an ounce more than the white metal which is historically unusual. That spread has fallen to about $110. The auto outlook is improving and that's bullish for platinum prices since the metal is used in catalytic convertors. Gero said the spread narrowing likely being caused by fund managers rather than retail buyers. Most retail business doesn't look at spreads he said.

Correction possible

While gold and other commodity prices have seen a stout rally in January some market watchers said they are looking for a potential correction as prices may have come overbought. Gold is set up for a mild correction as are commodities in general sometime in the week ahead. I look for gold to break $1,700 but find support at $1,690. The trend remains favorable overall said Ken Morrison founder and editor of online newsletter Morrison on the Markets. Some market analysts are pointing to fresh worries out of Europe. Late last year gold did not act as a safe haven when worries about the European debt situation intensified rather gold prices sold off along with all other markets as the dollar rose.

A few market analysts said it is important to keep that in mind now that concerns are rising about Portugal's financial health. Marc Chandler global head of currency strategy Brown Brothers Harriman said that Portugal appears to be plagued with the same issues that are affecting Greece. While we have warned in the past of risks that Portugal would need a second aid package, it is only since S&P joined the other major rating agencies on Jan 13 that more market participants have come over to this view he said. While Portugal's macro fundamentals are better than Greece's the difference is not of a sufficient magnitude to keep the wolf away from the door Chandler said who added the economic conditions in Portugal are likely to deteriorate.

Portugal is where Greece was 6 to 9 months ago. The question is (will) Portugal be where Greece is today toward the end of the year. Unless European officials take preventative action the rot will continue and the contagion risk remains real, Chandler said.


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