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METALS OUTLOOK: Volatility To Continue In Gold Next Week

(Kitco News) - Volatility will likely continue in the gold market next week, with headline news driving price direction, but traders' biases favor higher prices for the metal.

The outlook for higher gold prices certainly is not unanimous and underscores the why values have likely swung so much lately.

The most-active December gold contract on the Comex division of the New York Mercantile Exchange settled at $1,859.50, up 0.9% on the week. December silver settled at $41.624, down 3.4% on the week.

In the Kitco News Gold Survey , out of 34 participants, 21 responded this week. Of those 21 participants, nine see prices up, while six see prices down, and six see prices sideways or unchanged. Market participants include bullion dealers, investment banks, futures traders and technical chart analysts.

Richard Baker, editor of the Eureka Miner and president of CP Analytics, said the direction for gold prices next week is a "tough call" but he leans toward firmer prices. He said there are several factors that could result in a push-pull on values.

"U.S. dollar dynamics will cloud the movements of gold next week as it strengthens against the euro (six-month high this morning). Falling global markets on growth concerns and Western economy uncertainty may also cause liquidations in the precious metals.

Nonetheless, this is a headline-driven market and gold will continue to benefit on the margin until there is improvement in near-term expectations for Europe and to a lesser extent, the United States. Key gold-referenced commodity ratios (e.g., oil, copper) remain at recession levels," Baker said.

Those who expect higher prices said the persistent worries over European sovereign debt issues, especially regarding Greece, present strong support for prices. Greece is drawing closer to a default as bond yields there reach record highs. The euro currency fell to a six-month low against the dollar.

In Europe, several media reports said the European Central Bank confirmed the resignation of Governing Council member Juergen Stark. The reports said Stark is leaving due to personal reasons, but the reports said it was well known he was against the resumption of bond purchases last month. Also, Bloomberg News reported that Germany is preparing a way to recapitalize German banks should their Greek debt holdings swamp their balance sheets.

Gijsbert Groenewegen, managing partner of Silver Arrow Capital Management, said the news about Germany seeking to protect its banks shows how murky the European debt situation is, which makes investors seek the transparency of hard assets like gold and silver.

"The problem is the untransparency of the market. We just don't know what the banks are holding," he said.

He said the broader markets are also "tired" and could break easily on negative headline news, whether it is related to Europe or dismal U.S. economic news. How gold reacts maybe difficult to judge, though, he said.

If equity markets fall sharply, fund managers may be forced to sell gold holding to raise money to meet margin calls, so gold could fall if stocks do, too. But if that happens, Groenewegen said this would be an opportunity to buy gold.

Barclays Capital technical analysts said while they are bullish on gold prices, they'd rather buy the metal on dips "toward $1,750 against the $1,700 low. Our upside targets are at $1,930 and then $1,970."

Several market watchers said that gold prices may just end the week little changed from Monday to Friday, but that wide price swings are likely. They noted that gold prices have had trouble staying over $1,900 and have met selling resistance there. Plus, despite the moves to new highs recently, it hasn't been accompanied by a rise in open interest in the futures or greater buying of the physically backed exchange-traded funds.

In silver, Groenewegen said for that market to rally, it needs to push decisively through $43. Above there it could break out and retest $50. If silver can break through $50, then he expects a big rally that could take it to $100 very quickly.

Barclays Capital analysts said support for December silver is near $39.75, with resistance at $44.23.

By Debbie Carlson of Kitco News dcarlson@kitco.com

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

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

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