Gold, Silver Prices Smashed - Set For Big Meltdown?


Gold and silver futures prices were hammered hard Thursday and Friday, melting mining stocks to six-month lows. The precious metals lost luster as a safe-haven asset following a rash of positive economic reports, and traders sold at technical levels.

While the gold bulls scream at investors to buy the dip, some experts see a looming global recession sending gold and silver crashing as much as 50% this year.

Spot gold prices dipped 1.03% Thursday and another 0.58% Friday to $1,657.60 an ounce.

SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, fell 1.1% Thursday and 0.51% intraday Friday to 160.45.

PowerShares DB US Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, ended flat Thursday but ticked down 0.16% Friday to 21.80.

Market Vectors Gold Miners ETF ( GDX ) plunged 2.99% Thursday and 2.89% Friday to 41.98, a six-month low.

Market participants attributed the sell-off to a successful auction of European sovereign debt, weekly U.S. unemployment claims hitting a five-year low, Congress suspending the national debt limit and robust home sales.

"Therefore, we have less risk aversion and more risk appetite," Paul van Eeden, president of Cranberry Capital, a private Canadian holding company, said in an email. "I guess the market then speculates that a stronger economy could allow for rising interest rates and a cessation of QE (quantitative easing), which are both negative for gold.

"But when it comes to explaining the day-to-day gyrations of any quoted financial instrument, who really knows what the market thinks, as there really is no 'market,' just millions of people doing what seems to be like a good idea at the time."

Leo Larkin, an S&P Capital IQ equity analyst, believes gold bullion will rise 15% this year to about $1,930 an ounce and that should boost gold miners' stocks. He contends gold remains attractive to investors because low short-term interest rates reduce the opportunity cost of holding it, especially given the Federal Reserve's commitment to keeping rates near zero until at least mid-2015.

Global mine supply through the first three quarters of last year fell 1.9%, and production will likely remain low for the next several years as old mines get depleted and are not replaced enough to lift output.

Larkin rates the biggest gold minersBarrick Gold ( ABX ) andRandgold Resources ( GOLD ) with buy ratings andNewmont Mining (NEM) as a hold. He believes all three are in a position to grow profits by at least 35% this year as they increase production while benefiting from rising gold prices.

Gold Chart Analysis

Gold has been trading in a sideways range between $1,645 and $1,693 an ounce for the past four weeks. Whenever it reaches the top of the range, traders sell to take profits. And every time gold prices hit the bottom of the range, buyers snatch it up.

How to invest in this market?

The direction is unclear until gold breaks out of its recent range, says Janice Dorn, an independent gold trader in Phoenix. She believes it will take a move above $1,700 an ounce to attract more buyers.

Gold appears to have hit price resistance at its 50-day moving average and is hovering right above its 200-day moving average . Its chart looks very bearish as it has formed a series of lower highs and lower lows since peaking in October.

GLD's chart also features very weak IBD Relative Strength and Accumulation-Distribution Ratings of 25 and E. This means 75% of the market has risen higher and faster than GLD over the past 12 months and institutional investors are selling far more shares than buying.

"If physical demand again comes into the market strong as it did in recent pullbacks, that could put the brakes on any additional downward pressure," noted Christopher Blasi, president of Neptune Global Holdings, a Wilmington, Del.-based precious metals dealer."

Silver Prices

Silver prices dropped 1.73% Thursday and 1.61% Friday to $31.12 an ounce.

IShares Silver Trust (SLV) skidded 1.73% Thursday and 1.63% Friday to 30.15. It also appears to have hit resistance at its 10-week average. And it also has formed a series of lower highs and lower lows, typical of a long-term downtrend. Its IBD Relative Strength Rating of 34 and Acc-Dis Rating of D confirm the weakness.

Global X Silver Miners ETF (SIL) crashed 2.72% Thursday and 1.85% Friday to 20.72, its lowest price since late August.

"There are a lot of very bullish arguments as to why the miners are seriously undervalued right now, but until gold and silver trade much higher, and the broader investment community believes such high prices can stick around a bit, an outperformance in the shares is not going to happen," Blasi said in an email.

The Bearish Case For Gold And Silver

Gold will eventually crash to $1,000 an ounce and silver to the low teens, predicts David Hunter, a chief market strategist at KCCI, a small brokerage in Jersey City, N.J. He believes a global recession looms large and that it will spark the first instance of global deflation in 70 years.

"Europe and Japan are already in recession and likely to get worse. I expect the U.S. and China to join them," Hunter wrote in an email. "I am not buying the current Street consensus that the U.S. and China are going to strengthen as we move through the year.

"Monetary policy is far tighter than investors realize and we are getting austerity on top of that. This is going to lead to a downturn that I expect to be swift and steep given the leverage that overhangs this economy.

"As late as September of 2008, a broad consensus of economists were still forecasting that the U.S. was going to have a soft landing and avoid recession despite the fact a credit bust was only days away.

"I think we are seeing a similar situation today with economists and strategists and investors in general, getting more optimistic on the eve of what I think is going to turn out to be a historic global downturn."

Follow Trang Ho on Twitter @TrangHo ETFs

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: ABX , GDX , GLD , GOLD , UUP

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