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5 Reasons Gold, Silver Sell-Off May Be Short-Lived

By: Investor's Business Daily
Posted: 1/4/2013 6:41:00 PM
Referenced Stocks: GDX;GLD;SIL;SLV;UUP

Gold and silver prices ended the first week of the year nearly flat after four sessions of intense volatility rocked by the fiscal cliff deal, the dollar rallying from its lows and worries that the Federal Reserve will end quantitative easing sooner than expected.

SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, closed the week down 0.06% at 160.44, slightly below its 200-day moving average.

Market Vectors Gold Miners ETF ( GDX ) eked out a 0.89% gain, ending the week at 45.33. It appears to have hit resistance at the key 200-day line and is in a confirmed downtrend.

IShares Silver Trust ( SLV ) added 0.47% for the week to close at 29.24, below its 200-day line, which confirms a downtrend.

Global X Silver Miners ETF ( SIL ) added 2.31% to 22.51. It closed above its 200-day line but below the 50-day line, indicating a weak uptrend.

PowerShares DB U.S. Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, surged 0.96% to a one-month high of 21.99. But it's still trading below its 200-day line, which is bearish. The most volatile trading tends to occur below this line, so sharp moves have to be questioned.

Here are five reasons the precious metals bugs believe traders should buy gold and silver at current levels.

1. They're oversold and likely to stage a short-term rebound on bargain hunting.

"Gold and silver are the most oversold near term of any major market we track," Harry Dent, founder of HS Dent in Tampa, Fla., wrote in an email. "Hence, we think there is not a lot of downside and more upside than in stocks in the months ahead." Dent projects gold futures will rise to $2,030 to $2,080 an ounce if it can break above $1,800 an ounce.

2. They may find support at December lows.

If GLD holds support at its Dec. 20 low of 158.39, Anthony Welch recommends buying with a stop below 157. He is a principal at Sarasota Capital Strategies in Osprey, Fla., and portfolio manager of Currency Strategies Fund . Although the dollar is rallying against the euro and pound, it's falling against the Australian and Canadian dollars, which he expects will continue.

"Gold wasn't meant to be day traded, rather it has served as a store of value for thousands of years and generally should be considered as such," Anthony Welch wrote.

3. The sell-off may have been a knee-jerk reaction to the Federal Reserve's minutes showing that some members believe it should end the quantitative easing program before year's end.

The selling Thursday and Friday resulted from traders booking profits as the news emerged, says Yiorgo Aretos, founder of TMP Group, a stock market research firm. When a few traders sell on the news, the crowd follows suit, selling on fear.

Gold and silver prices are suffering from short-term euphoria that the global economy is improving says G. Miguel Perez-Santalla, a vice president of business development at BullionVault.com, an online precious metals dealer and storage provider.

4. If U.S. economic growth slows, the Federal Reserve will have to maintain its quantitative easing plan.

"U.S. growth is going to slow in the first quarter and that will fuel more stimulus globally and the Fed may back off of (Friday's) statement that they may curb QE3 later this year," Dent wrote. "If China does continue to see growth accelerate and add more stimulus, as we expect, gold and silver will like that as well. Fifty-two percent of gold purchases come from China and India."

5. Uncle Sam is still drowning in debt and spends more than he makes.

"Washington is obviously going to continue running deficits and (Federal Reserve Chairman Ben) Bernanke is going to accommodate, which is bullish for gold," Adrian Day, president of Adrian Day Asset Management, said in an email.

The Bear Case

Gold is selling off because deflation poses a greater risk to the global economy than inflation, said Bill Strazzullo, chief market strategist at Bell Curve Trading in New Jersey.

"The main drivers of global economic growth: U.S., Europe, and China all have significant questions/challenges regarding their economic performance in 2013," Strazzullo, said in an email.

He projects gold will drop below $1,600 an ounce and silver $27-$28 an ounce in the short term. Gold will slip below $1,400 an ounce and silver $20 an ounce longer term, he said.

Precious metals prices have been falling as the dollar strengthens against the yen, pound and euro. The yen is depreciating under the weight of the country's debt, which hovers over 220% of GDP, and the Bank of Japan debasing the currency to boost inflation.

"We see the market shifting from the speculative currencies (euro, yen and pound) to something that is relatively more stable -- the U.S. dollar," Andrew Norman, an analyst at BullandBearMash.com, said in an email. "The U.S. dollar trend remains key."

Follow Trang Ho on Twitter @TrangHoETFs .