Gold, Silver Prices Hold Gains as Oil Stabilizes

ByAlix Steel
03/07/11 - 12:39 PM EST
THE STREET

NEW YORK (TheStreet ) -- Gold and silver prices were easing off recent highs Monday as profit taking battled with safe haven buying.

Gold for April delivery was adding $4 to $1,432.60 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,445.70 and as low as $1,428.30. The spot gold price was flat, according to Kitco's gold index.

Silver prices were following gold, rising to 71 cents to $36.04 after hitting a 31-year high of $36.74.

As oil prices go, so do gold and silver. The precious metals followed black gold higher in overnight trading. Gold hit a high, silver broke to a 31-year high and oil prices surged to a two-and-a-half year high. Investors were buying gold and silver as protection against uncertainty in the Middle East, an ongoing civil war in Libya, rising inflation led by high oil prices and loose monetary policies. Mid-way through the trading day all three commodities backed off their recent levels as investors took profits.

James Moore, research analyst for FastMarkets, wrote Monday that new highs in silver could trigger profit taking "but with the situation in the [Middle East/North Africa] region still extremely volatile and oil continuing to rise, both gold & silver are likely to extend on a mix of safe-haven and anti-inflationary hedging with silver set to challenge $38-40 an ounce but ultimately the all-time record of $50 an ounce."

David Morgan, founder of Silver-Investor.com, is long on silver using silver stocks. "The equities are lagging the metals and if this rally is going to continue the equities will play catch up pretty quickly," he said. Morgan would use the same strategy with gold stocks versus the underlying commodity.

"Value wise, silver is still the better play." Currently, the silver to gold ratio (how many ounces of silver it takes to buy an ounce of gold) is roughly 40:1 and Morgan thinks the ratio could sink as low as 16, which, at current gold prices could put silver at $90.

"Short-term [however] it looks like there might be an opportunity to make a ratio trade which means you want to take silver and trade it for gold at this 40:1 level. If it snaps back and gold starts outperforming silver, which I suspect could happen, ... then you might get a retracement to the 60:1 area ... [then] trade back the other way."

Although the safe haven buying is primarily a reaction to the Middle East turmoil, Moody's downgraded Greece's credit rating Monday from Ba1 to B1 with a negative outlook reminding investors that the worst might not be over for the Eurozone nations. EU leaders are meeting at periodic summits during March to develop and debate a permanent bailout fund and strict guidelines on debt reduction to secure the cash.

The lackluster jobs number in the U.S. on Friday also underscored that the Federal Reserve won't be raising rates any time soon or be making any adjustments to its $600 billion bond buying program, set to expire in June. The Fed has been blamed by some for triggering high inflation world-wide as low rates triggered a flood of money into higher yielding emerging market currencies like those in the Middle East and North Africa, a spark for recent turmoil.

Fed chairman Ben Bernanke, has said that a change in monetary policy isn't on the table unless the jobs outlook improves. Easy free money in the U.S. should offset any rate hikes out of the EU as a weak dollar continues to support higher gold and silver prices.

The U.S. dollar index was flat at $76.44.

Over the weekend, the Chinese government laid out its long term economic plans which focused on taming inflation and increasing personal wealth. The move would make China rely less on export demand and more on internal consumption. China, despite wealth inequities, bought 200 tons of gold in January and February. The figure accounts for individual purchases not central bank purchases. More purchasing power and higher wealth will only ramp up gold purchases.

Despite China's efforts to tame inflation, raising rates 3 times in the last six months, higher wages will only add to the inflation theme in the country. Real interest rates (interest rate, 3%, minus the inflation rate, 4.9%) is currently negative 1.9%, the figure will be revised on Friday when China releases its inflation reading for February.

At the BMO Capital Markets Global Metals and Mining conference in Florida last week, many CEOs cited strong demand from China and India as indicative of gold's popularity.

Mark Cutifani, CEO of AngloGold Ashanti(AU), said "I think with China [and] India, the way the world looks at gold, the way its performed through the recent crisis that you really can't afford to not have gold in your portfolio." Barrick Gold(ABX)'s CEO, Aaron Regent, said that "you can also see gold within countries like India and China ramp up gold demand [and it] is growing quite rapidly. So I think gold is being recognized as a monetary asset and is a great store of value ... and I think that will continue."

Demand for gold wasn't coming from the ETF sector. The SPDR Gold Shares(GLD) didn't added any tons last week despite record gold prices. Currently the ETF holds over 1,210 tons leaving many to site strong physical demand from China as a culprit for recent highs. ETFS Physical Asian Gold Trust(AGOL) has added 4,798.18 ounces since inception on January 31st 2011. The ETF isn't an Asian ETF but the gold is stored in Singapore and Will Rhind, head of U.S. operations for ETF Securities, has said that factor could be appealing to Asian investors.

Gold mining stocks, a risky but profitable way to buy gold, were mixed.

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