Gold, Silver Rise as Inflation Protection

Gold and Silver both continue to rise as a hedge against continuously rising inflation. Both gold and silver continue to look bullish for investors and many still continue to buy the metal for protection.

By Alix Steel
04/04/11 - 02:54 PM EDT

NEW YORK (TheStreet ) -- Gold prices reached for record highs Monday and silver hit a 30-year peak as investors piled into the metals as protection against inflation.

Gold for June delivery added $4.10 to $1,433 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,440.30 and as low as $1,429.10 while the spot gold price was adding $4, according to Kitco's gold index.

Silver prices jumped 76 cents to $38.49 after hitting a 30-year record of $38.62 an ounce. Backwardation in silver has reversed, which means the spot month is now trading lower than future months. This signals that the supply crunch seen in February and March has ebbed for now, creating a possible headwind for prices.

"While silver is overbought in the very short term, silver's outlook remains bullish," says Mark O'Byrne of Goldcore, a bullion dealer. "Silver remains the preserve of a handful of contrarian and hard money advocates and is only beginning to enter the consciousness of the mainstream." As silver becomes more "trendy" then the market could see more physical shortages.

In the latest COT [commitment of traders] report, there were 37,139 more speculative long positions than short in silver and 193,121 more longs for gold which points to either recent short covering or an inflow of "hot" money. In total, however, once you add commercial positions, there were more short than long holdings for both metals.

Despite the threat that the European Central Bank will raise interest rates on Thursday, investors piled into gold and silver Monday. The idea that the ECB would have to raise rates regardless of anemic economic growth in Europe underscores how serious inflation actually is.

"If rates go up it means to traders that economies are improving and inflation is apparent," says George Gero, senior vice president at RBC Capital Markets. "Higher open interest, higher moving averages, higher closes and higher volume all adding to bullish outlook."

Oil prices were also soaring to a 31-month high as fighting in Libya centered around an oil producing city. High oil underscores high overall inflation. Even some Federal Reserve presidents were chattering about needing to raise rates by the end of the year.

Even if the Fed raised rates by 75 basis points, as suggested, real rates would still be negative. Gold and silver become attractive in negative real interest rate environments as people's money in the bank is worth less making hard assets worth more.

"Upside target for gold remains $1,450," says James Moore, research analyst at FastMarkets. "Silver could look to target the $39-$41 area."

Both metals will get some help from a volatile U.S. dollar, which could suffer if the ECB raises rates and boosts the euro. Phil Streible, senior market strategist at Lind-Waldock, says that markets are pricing in a rate hike of 25 basis points from the ECB, but that's it and, after the move, the hawkish comments from the central bank will subside.

"I don't think that [a rate hike] will stop the market at all, I think we are going to propel higher on it," says Streible.

The Bank of Japan and the Bank of England will also deliver interest rate decisions on Thursday. The former is expected to ease further while the Bank of England is expected to leave rates low. The Federal Reserve won't meet until the end of April.

If silver is slightly overvalued as the end of backwardation suggests, is gold? Sam Stovall, chief investment strategist at Standard & Poor's, doesn't think so. "Over the past 40 years the S&P 500 has been worth an average of only 5% more than the price of gold. Today, this value is 0.92," which means that gold is inexpensive relative to stocks.

Gold mining stocks, a risky but profitable way to buy gold, were mostly higher. Kinross Gold(KGC) was adding 0.33% to $51.41 while Goldcorp(GG) was flat at $49.26.

Other gold stocks, Agnico-Eagle(AEM) and Eldorado Gold(EGO) were trading at $64.33 and $16.10, respectively.

New Gold(NGD) was sliding 5% Monday after the company announced it would acquire Richfield Ventures for $550 million.

--Written by Alix Steel in New York.

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