Gold Bounces Back; Silver Struggles

After dipping slightly, gold has bounced back recouping most of its losses while silver struggles to gain its momentum back. The sell off in gold and silver was somewhat expected given the recent surge in prices.

By Alix Steel

05/02/11 - 12:27 PM EDT

THE STREET

NEW YORK (TheStreet ) -- Gold prices were popping and silver prices were trying to stem an abrupt selloff Monday, which had hit markets overnight.

Gold for June delivery was adding $7.70 to $1,564.10 an ounce at the Comex division of the New York Mercantile Exchange. After losing 2.5% to fall to $1,540.30, the metal rallied to $1,577. The spot gold price was down $1.20, according to Kitco's gold index.

Silver prices were shedding $2.06 to $46.53 an ounce, after plummeting 13%, bouncing off the $42.20 level. The U.S. dollar index reversed directions after an earlier rally and was losing 0.27% at $72.83. The U.S. dollar index was down almost 4% in April and still has yet to break below its record low of $71.

The selloff in gold and silver had been anticipated to some degree given the surge in prices. Both metals soared 8.92% and 28.72% in April, respectively, and many traders had been looking for an overbought correction.

"This had to happen," says Anthony Neglia, president of Tower Trading "all good bull markets give some back." Silver held the $42 level with the next support level of $40. Neglia, who predicted that silver would hit $50 before $40 in April, categorizes himself as the glass if half full trader. "[Silver] did have trouble getting through $50 but I still believe it can."

Silver is also being negatively impacted by new margin requirements from the CME, a 13% increase and the second in a week. Now it takes $14,513 to buy one speculative futures contract of 5,000 ounces of silver versus $12,825. The move makes silver more pricey to buy and also triggers selling by some who dump, now more expensive, positions.

"[Silver] sold off on only 9,000 lots," says Mihir Dange, trader at Arbitrage, "the last time margins were raised on silver we [saw] it take a tumble as investors sell their silver to raise additional capital. This could be the healthy pullback that silver needed to get new long in and weak longs out."

Jeff Nielson, guest contributor at TheStreet, argues that if there were a lot of long speculators "who piled-in after the last margin-hike, then this current move lower could last several days or perhaps a week ... [but] if all of the leverage in the sector had already been squeezed-out by the last margin-hike a week or so earlier, then this could be just a one- or two-day event."

The London and Hong Kong markets were closed on Monday, which means thinner trading volumes especially in the physical/spot market. Volume was rebounding, however on the Globex, which for gold was 148,579 currently compared with 157,177 Friday.

The death of Osama Bin Laden triggered a rally in the U.S. dollar index as investors were cheered by a presumed reduced terror threat in the country. A stronger dollar is pressuring gold and silver as the dollar-backed commodities become more expensive to buy in other currencies. There was also a general risk on trade as traders opted for stocks instead of safety metals.

As trading continued, initial fervor wore off and the U.S. dollar continued its downward slide, which helped prop up the metals. Silver was still struggling but has recouped half of its overnight losses.

Neglia argues that "silver is going to continue to rally -- we will see $50 and above shortly."

Monday's volatility doesn't mean that the metal's bull market is done, just that the correction that traders have been waiting for has happened. The price reversal might have triggered sell stops, where traders are forced to sell to lock in gains. Other traders are taking advantage of the downward move.

"I'm short silver and staying short," says Scott Redler, chief strategic officer at T3Live.com, "I might add to my shorts today [if we] get a retest of that $42 [level], because that is still a nice percentage lower."

A possible positive for gold and silver, widely overlooked today, was the news that April manufacturing activity slowed in China. The news will most likely decrease pressure for the central bank to aggressively raise interest rates to combat inflation. Real interest rates are currently negative 2.15 and now look set to stay that way for an even longer period.

Gold mining stocks, a risky but potentially profitable way to buy gold, were still struggling. Kinross Gold(KGC) was losing 0.63% to $15.74.

Goldcorp(GG) was 2.08% lower at $54.67 while Agnico-Eagle(AEM) and Eldorado Gold(EGO) were trading at $68.06 and $18.40, respectively.

--Written by Alix Steel in New York.

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