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METALS OUTLOOK: Volatility Expected Again In Metals As Market Stays Focus On Europe

(Kitco News) - Volatility is expected to remain in the precious metals markets next week as traders continue to watch the headlines out of Europe for direction.

After the big sell-off in nearly all markets in the past several days, gold prices have come off of their lows, but confidence that the market is ready to resume its solidly higher uptrend isn't firm. Several market watchers said it will take days, maybe weeks for the volatility caused by the sharp price drop to even out.

Silver and platinum group metals could still suffer further losses, especially if investors focus on their industrial nature, rather than any safe haven quality. Technical chart analysts said those markets are having their uptrend movements questioned, at least in the short-term.

The most-active December gold contract on the Comex division of the New York Mercantile Exchange settled at $1,622.30 an ounce, down 1.07% on the week. December silver settled at $30.083 an ounce, down 0.06% on the week.

In the Kitco News Gold Survey , out of 34 participants, 25 responded this week. Of those 25 participants, 13 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.

Participants in the survey who see higher prices said it appears that gold is trying to build a base above $1,600 an ounce. Some also cited the strong buying interest in the physical markets, especially out of India, when gold prices slipped under $1,600.

Still, volatility is expected to be a big part of the trading week - several participants said they wouldn't be surprised if gold still experiences sizable swings as the market looks for equilibrium.

Friday marked the end of the month and the quarter and more than a few in the market are probably happy to close the books on September.

"It was a rough month for gold. It lost 11% in September," said Bill O'Neill, principle with LOGIC Advisers.

He said the weakness in gold this month, particularly during the break that pushed gold as much as $400 off its record highs was due to "money flow" as hedge funds and non-traditional commodity investors sold their gold holdings as every market except the U.S. dollar and U.S. Treasury market fell sharply.

"Not much has changed for the reason to own gold," he said, as interest rates remain low and uncertainty regarding the global economic outlook continues to occupy headlines.

Commodities in general were hit hard during the market rout, he pointed out, not just gold. He believes most of the selling by the non-traditional commodity investors is over, which could work in gold's favor. They also might not be back so soon, either. "Commodities are no longer the flavor of the month, so I think they'll be slow to come back in," he said.

O'Neill said the pressure on commodities stemmed in part to concerns that China's economy is faltering more than originally thought and wouldn't experience a "soft landing." He doesn't agree with that view, but said nevertheless, that's the prevailing opinion. Since China is the biggest buyer of commodities globally any ratcheting down in their ability to buy raw materials could translate to lower prices of those goods.

For next week the focus again will be on Europe, market watchers said. Much of the nervousness in the markets comes from what might happen with Greece and its struggling economy and many believe a default for the southern European nation is a foregone conclusion.

The European Central Bank also is meeting next week Analysts at Brown Brothers Harriman said some sort of monetary accommodation is likely, with a rate cut possible. That would put more pressure on the euro and support the dollar. Dollar strength lately has pressured gold.

"Markets are hanging onto every development in the eurozone, even though things are moving at a much slower pace than U.S. traders are accustomed to. That explains the volatility in metals prices although it makes things more difficult to interpret," said Tom Pawlicki, analyst at MFGlobal.

Pawlicki also noted that pressure on gold could also come from a minor seasonal pattern which shows that gold prices fall between Sep 28 and Oct 19. The market has fallen in 7 of the last 10 years by 1.8% on average.

In the U.S. next week the all-important employment data will be released on Friday. Thursday's initial jobless claims were a spot of good news as jobless claims were lower than expected, but one week's data does not make a trend. Trade could slow as the time grows closer to the data's release.

Analysts at Nomura said they expect an increase in total nonfarm payrolls in September of 60,000. If there are no revisions to past data and Friday's figure are in line with their forecast, then that would lead to a 3-month moving average for job creation of just 48,000 and ruffle "the feathers of the doves on the FOMC that would like to provide more stimulus for the labor market."

Economic data is key to the health of the industrial commodities. Silver and the platinum group metals were hit harder than gold during the market rout, and those markets haven't seen as strong a rebound as gold did from the spike lows.

Until a better sense of how the economies of the world are doing - both in the U.S. and Europe - the industrial metals will wear this pairing like an albatross, even as prices for PGMs might be attractive.

"I think platinum is a good buy here - we see physical demand is strong - but I don't advise rushing back into the market. Let the smoke clear," O'Neill said.

O'Neill expects October as a whole to be a very choppy trading month without much direction as after September's volatility many people are sitting on the sidelines. "It's very nebulous out there. People are not aggressive to commit. With the European situation, supply and demand fundamentals are going to be a background factor," he said.

By Debbie Carlson of Kitco News dcarlson@kitco.co;

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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