(Kitco News) - Gold prices could continue to weaken into next week as nervousness over European banks eases somewhat, technical chart patterns turn short-term bearish and investors turn to riskier assets like the stock market.
Strength in the U.S. dollar may also put pressure on gold, market watchers said.
On the week, December gold futures prices on the Comex division of the New York Mercantile Exchange settled at $1,814.70 an ounce down 2.4% on the week. December silver settled at $40.831 an ounce, down 1.9% on the week.
In the Kitco News Gold Survey , 28 out of 34 participants responded. Of those 28 participants, nine see prices up, while 15 see prices down and four see prices sideways or unchanged. Market participants include bullion dealers, investment banks, futures traders and technical chart analysts.
Tom Pawlicki, precious metals analyst at MFGlobal, said precious metals are expected to keep the mixed-to-lower price trend in the near-term as investors appetite for risk improved. He said it's possible to see gold prices falling back to the $1,750 level as technical chart factors suggest prices could fall as low as $1,750.
After sinking this week, gold prices rallied on Friday, which George Gero, vice president of RBC Capital Markets Global Futures and precious metals strategist, attributed to short covering, rather than new buying. He said the meeting in Poland regarding the eurozone's financial health and general worries about Europe have created some anxiety in the hearts of traders going into the weekend. Combine that with a mostly steady stock market and gold rallied.
Gero is keen to see what the open interest levels will be in the Comex gold futures once the session ends. Gold futures saw little rise in open interest during the rally to new highs and open interest has been stagnant lately, which can be a sign that new participants are not coming to the market. "I want to see open interest not only up in the front months, but also in the back months," Gero said.
Next week the big factor for the financial markets, metals included, will be the two-day Federal Reserve monetary policy meeting, set for Sept. 20-21. Market watchers who expect the Fed to announce some sort of stimulus program said that could benefit all markets, including metals.
For those market watchers like Pawlicki who believe there is little chance of any further quantitative easing said the disappointment could weigh on prices.
Pawlicki pointed out that the Fed's efforts to supply liquidity back in 2008 and 2009 ultimately didn't have much impact on gold prices. "Gold seemed to be more sensitive to the impact of the credit squeeze on the economy and to events in the stock market with regard to 'risk-on/risk-off.' Gold prices actually moved lower during the period that liquidity swaps were made available, but it was likely because stocks were falling sharply at the time and gold positions were likely sold in order to raise capital," he said.
News reports that European banks have been selling gold to raise dollars also pressured prices, he said.
European banks' access to dollars should be eased now following the European Central Bank and other central banks decision to flood the market with dollars. European banks faced a credit crunch when private banks wouldn't lend to them, but the ECB's action should ease worries for the time being about the solvency of those banks. This move gives investors one less reason to seek a safe haven, several market watchers said.
While the short term concerns about Europe have simmered, the problems there with sovereign debt have not changed and longer term this will support prices, several market participants said, making current weakness a temporary issue.
News headlines will shape short term direction, said TD Securities, "with investors switching from pessimism to optimism on the flimsiest of information and rumors. We expect this trend to continue for the foreseeable future, with industrial commodities and gold moving up and down in an erratic manner."
Despite the ebb and flow of news, the fundamentals point to higher gold and selling pressure on industrial commodities in the short to medium term, they said, noting that there should be "some sort of Greek restructuring in the coming months, weak economic western world performance and low interest rates for longer in the US and Europe."
Inevitably, the bank said, the fundamentals for gold have not changed, and even though Germany and Frances have had "kind words uttered" for Greece's residency in the eurozone, restructuring of its national debt will have to happen and that will have contagion effect on debt offered by other European countries with shaky economies.
Robin Bhar, senior metals analyst at Credit Agricole-CIB sees gold prices starting to bottom out after recent weakness, and he said gold should hold over $1,750 next week. In addition to wariness ahead of the FOMC meeting, he said trading volume may be lighter than normal because of the meeting of the London Bullion Market Association's meeting in Montreal next week, a key industry gathering.
Regard silver, market watchers said considering the metal's price has broken technical chart support, it is vulnerable to seeing further weakness, especially if gold prices continue to tumble. Pawlicki said that December silver could reach support at $38.76 from the Aug 25 low.
Gero said silver is struggling at the $41 level. While it has tied its fortunes to gold, its industrial use can hinder any rallies since there are concerns about the global economic health. Longer-term, though, silver has potential to rally, he said.
By Debbie Carlson of Kitco News email@example.com