Gold and silver regained luster as the dollar plunged to a
two-year low after Washington averted a crisis by raising the
country's debt limits through Feb.7.
The bulls and bears have to decide whether precious metals are
staging a short-covering rally from oversold conditions. Or is it
a real trend change in response to the temporary spending
contend that lifting the debt ceiling calls for more Federal
Reserve money printing, which in turn debases the dollar and
lifts prices of precious metals.
"The government reopened without any spending cuts and the
debt ceiling was raised without any budgetary discipline, which
suggests that the overspending and excessive monetary creation
will continue," said Adrian Day, founder of Adrian Day Asset
Management in Annapolis, Md., with $125 million in client
"Yesterday's deal represents the capitulation by all
congressional factions to the intractability of the U.S. debt
problem, by effectively shelving the debate until Feb. 7," Tom
Winmill, portfolio manager of Midas , with $205 million in assets
under management, said in an email. "Perhaps the precious metals
markets sense that the next four months may be promising clear
sailing for hard-asset prices."
Thursday's Price Action
Spot gold prices popped 3% to $1,324 an ounce intraday.
stock market today
,SPDR Gold Shares (
), tracking a 10th of an ounce of bullion, gapped up 3% to
127.62. It still trades below its 50-day and 200-day moving
averages, indicating a strong downtrend.
Market Vectors Gold Miners ETF (
) surged 7% to 24.93. It still trades below its 50- and 200-day
PowerShares DB U.S. Dollar Index Bullish (
), measuring the greenback against a basket of major foreign
currencies, skidded 1% to 21.47 -- it's lowest price since
October 2011. The 10-year Treasury bond yield has dropped 7 basis
points to 2.73%.
The Bear Case
Lower bond yields imply a higher gold price because the
opportunity cost of buying gold decreases as investors earn less
on cash, but short-covering was the primary driver of gold's
rally, according to analysts at Standard Bank.
Short positions, betting on falling prices, in gold futures
has been increasing as prices declined over the past week,
suggesting new short positions were added and were covered over
the past 24 hours, they suspect. All the while new long
positions, betting on rising prices, are waning.
Economist Harry Dent, founder of HS Dent in Tampa, Fla.,
believes gold and silver were just rebounding from oversold
"Gold has been mortally wounded by accelerated stimulus but
with falling or muted inflation," he said in an email. "We are in
a deflationary environment with governments inflating massively
to prevent (deflation)."
Gold, seen as a hedge against inflation, loses value in
deflationary environments. Dent believes gold could make a
short-term bounce to $1,420-$1,520 an ounce through the first
quarter of 2014 and then roll over, eventually sinking to
$700-$740 an ounce in 2015. He goes so far as forecasting gold
will tumble to $250 an ounce between 2020 and 2023.
The Bull Case
The gold bugs on the other hand are betting on Janet Yellen to
take over for Federal Reserve Chairman Ben Bernanke and believe
she will continue quantitative easing.
"As recession bites, I think we will not see and end to (QE)
under Yellen," John Browne, senior economist at Euro Pacific
Capital, a brokerage firm Westport, Conn., said in an email.
"Plus a continued negative real interest rate favors gold and
Physical demand for gold remains strong, says Terry Sacka,
chief strategist at Cornerstone Asset Metals in Palm Beach
"With a partial debt resolution and Janet Yellen being brought
into the Fed, most will conclude the printing will continue," he
wrote in an email. "A rush may occur in physical purchases to try
and catch a bottom and shore up some inventory."
Silver prices climbed 2.5% to $22.06 an ounce.
IShares Silver Trust (
) bounced 3% to 21.15.Global X Silver Miners ETF (
) soared 7% to 12.95.
SLV and SIL remain below both their 50- and 200-day lines,
indicating a strong downtrend.
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