Gold, Silver Reverse Higher; Is This The Real Bottom?

By
A A A

Gold and silver prices staged dramatic reversals Monday after diving to new lows in early trade on heavy short covering, bargain hunting and a weaker dollar.

Gold spot prices climbed 2.54% to $1,396 an ounce.

"Gold has long-term support at $1,300 (an ounce). The next support levels would be the 100 levels, $1,200, $1,100, especially $1,000," James DiGeorgia, editor of "Gold And Energy Advisor" wrote in a client note Monday. "Prices are close to break-even for many gold manufacturers. Once prices go below the production cost for gold, suppliers will probably cut production, and prices would stabilize and even rally."

On the stock market today SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, surged 3.09% to 135.12 after nearly revisiting a 52-week low in early trade.

Market Vectors Gold Miners ETF ( GDX ) vaulted 6% to 28.03 in heavy volume after bouncing off its lowest price in four and a half years.

Overly Bearish Sentiment

Bearish sentiment has reached rarely seen extremes, increasing the likelihood of a gold rally as the market usually defies the crowd, says Tom McClellan, founder of "The McClellan Market Report."

"Sentiment is skewed right now in an historic way, and that will make it nearly impossible for the price decline to continue in a meaningful way," he wrote Friday.

The yellow metal likely is bouncing from oversold levels but as it tries to rise, disappointed investors  will sell to end the pain, giving way to a "very volatile and prolonged" downtrend, says Richard Peterson, managing director of MarketPsy Capital in Santa Monica, Calif.

"There is a lot of hot money betting gold will fall and a lot of panic," Peterson wrote in an email. "As the U.S. economy recovers, the long-term fear and pessimism that drove most gold investment from the U.S. will thaw," Peterson wrote. "And gold investors will then realize they should take some risk in equities rather than holding on to a zero-yield asset with a falling price."

Supply And Demand

The gold bugs argue that epic physical buying in China and India proves demand for jewelry and bullion remains robust. Chinese demand totaled 294 tons in the first quarter, up 20% from the year-ago period, The World Gold Council stated in its latest report. In India, total demand rose 27% year over year to 257 tons. Central bank buying totaled 100 tons, marking the ninth straight quarter of net buying, although it eased 5% from a year ago.

But panic buying in China and India is a contrarian bear-market indicator, says Ron DeLegge, editor of ETFGuide.com .

"A true market bottom in gold, or any asset, is always greeted with panic selling, not enthusiastic buying as we have now," he wrote in an email. "Gold bugs that think they've seen capitulation in the gold market haven't seen nothing yet." DeLegge recommended shorting, to profit from falling prices, in mid-February by buying Direxion Daily Gold Miners Bear 3x Shares ( DUST ) and put options on GDX.

On a global basis, gold demand in the first quarter fell 13% from the year-ago quarter to 963 tons, the WGC reported. Technology demand fell 4% to 102 tons. Global jewelry demand lifted 12% to 551 tons. ETF investors redeemed 177 tons, while total investments in gold bars and coins came to 201 tons. Overall investment demand -- including ETFs , bars and coins -- totaled 320 tons, about the same as the year-ago period. Total mine production rose 4% to 688 tons.

Effects Of U.S. Dollar

Aside from waning investor demand, gold has been pummeled by the dollar's strength -- owing to weakness in the eurozone economy and Japan's currency debasement. A stronger dollar drives down prices in dollar-denominated commodities. Both the yen and euro snapped back from new lows Monday, pushing the U.S. dollar index down. But the outlook and charts for both currencies look bleak.

PowerShares DB U.S. Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, slipped 0.61% to 22.78. It appears to be pulling back from overbought levels and remains in a strong uptrend long-term.

"Investors have shifted their buying towards equities, especially dividend-paying stocks," DiGeorgia wrote. "This trend and the stronger dollar have been bearish for gold."

Silver Prices

Silver prices surged 2.96% to $23.02 an ounce.

IShares Silver Trust ( SLV ) gapped down 2.5% at the open to a fresh 2 1/2-year low. It rallied the rest of the session, ending ahead 4% at 22.25 while volume swelled three times average.

Global X Silver Miners ETF (SIL) also gapped down at the open to a new all-time low and reversed higher. It closed up 5% to 13.50.

Silver will likely see selling for the foreseeable future on any attempts to rise owing to low demand and huge stockpiles, according to analysts at Standard Bank .

"We estimate that above-ground inventory in China (the growing source of demand since 2009) is currently as high as 18 months of fabrication demand, up from 16 months at the start of 2012 and only four months in 2009," they wrote in a client note. "While the futures market is getting increasingly short, with the backdrop of the metal contained in stockpiles, we still expect rallies to fade."

Gold ETF holdings have shrunk 17% this year, while silver ETF holdings have ticked up 1%. The potential for ETF selling puts even more pressure on silver, they added.

Follow Trang Ho on Twitter @TrangHoETFs .



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: DUST , GDX , GLD , SLV , UUP

Investor's Business Daily

Investor's Business Daily

More from Investor's Business Daily:

Related Videos

Stocks

Referenced

Most Active by Volume

270,887,127
    $93.89 unch
225,243,115
  • $40.93 ▼ 2.74%
135,900,109
  • $47.52 ▲ 1.80%
89,467,924
  • $5.35 ▼ 1.11%
85,105,358
  • $16.95 ▼ 0.53%
80,748,539
  • $39.80 ▼ 4.21%
68,491,586
  • $3.57 ▼ 1.79%
62,097,356
  • $100.96 ▼ 0.82%
As of 9/19/2014, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com