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The Bullion Report

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December 29, 2010 in 'The Bullion Report'

Under PressureUnder Pressure

12-29-10

Under Pressure


Precious metals have made several fresh highs this year, capping off a performance that is often compared to the price runs seen in the early 1980s. Some analysts are looking for selling pressure as traders close their positions as the year ends, but others argue that any price dip will just bring more investors. Is there a potential for a strong sell-off in metals or an argument for bargain hunting?

What motivates a sale in gold or silver?

The easiest way to find a source of selling pressure for precious metals is to look at the things that are usually associated with a rise in prices:

- A change in the US dollar
- Changes from central banks
- The outlook for inflation
- Supply dynamics
- Demand sources

The price of gold can be largely determined by the US dollar. They might not move step for step against each other, but a weaker dollar can prompt investment in gold. Likewise, a stronger dollar can cause some longs to flee. The sources of the weaker dollar include policy changes from the Federal Reserve and weak economic outlook for the United States. The latest quantitative easing program from the Federal Reserve sparked a lot of criticism and loss of faith in the monetary policies. This definitely led to a bolder outlook for gold prices. When the Fed purchasing of bonds ends – if it ends – the fallout would probably spark some significant selling in gold and silver. Watch for investors closing long positions following any news that the programs are ending. If there is no renewed stimulus effort through the first half of next year, it is likely that gold bugs will encounter some skepticism.

At this point, it doesn’t seem like the greater threats to economic stability are behind us. There are still big obstacles to overcome in housing markets and employment. These will be the potential motivators for support of metals prices as well as continued efforts to maintain low interest rates.

Speaking of interest rates, those are another source of ebb and flow in precious metals. Any hike in interest rates (or whispers of a Fed move to come off these low levels) would signal that the economy could be gaining a strong foothold. Even if recovery isn’t in full bloom, there could be a move made in 2011 to change things. Again, this could be a catalyst for sales. Inflation will be the big word, as it has been on any extra money printing. As it stands, the global money supply needs to see some trimming before all fears could be dispelled.

Supply and demand-wise, there is little to prompt selling on mining news. Big deposits of gold and silver certainly caused instability in historic market prices. Modern era reserve statistics suggest that there are no huge discoveries waiting to destabilize things. Demand on the other hand has shown significant points of weakness that are worth being wary of. The big demand numbers to look at include ETFs and other investor interest. One of the big stories of 2010 was the surging demand for bullion investments. This demand growth had tapered by the third quarter, but didn’t drop off completely. Contraction of this kind of metals demand would probably bring out the sellers. As long as mint sales keep moving along and metals make headlines, it is probable that investors are still looking to add gold or silver or both to their repertoire.

A wild card for any analysis for the new year is specific investor action. One of the largest price declines in each market relates to kinds of manipulation or attempts to add controls. The Hunt brothers decimated the silver markets and the price declines that followed their attempts to corner the market were epic. The recent accusations of market manipulation could provide similar disenchantment. In gold, the actions of central banks remain key. Those low prices from the 1990s were sparked by rumors of gold sales from central banks. The drop in prices was stemmed by the agreement to limit annual gold sales. That agreement doesn’t extend to all banks across the globe. With fresh highs in precious metals, there could be a selling opportunity for someone other than regular consumers. Any hint of large gold sales could signal a fire sale. However, speculation that banks across the globe are looking for alternatives to the US dollar in their holdings would probably be enough to stem any action of that caliber.

Summary

One of the most obvious arguments for selling pressure in either market falls on the idea of profit taking. There seems to be lingering investor logic that price rallies offer an opportunity to close a position. This approach rears its head when it looks like there might be greater risk to chasing the market higher. The end of the year could be a great catalyst for this. After all, in a year when there might be other losses from the broader market, it could be a good idea to close some things out at a profit. There is probably still a lot of concern related to memories of the commodity price drop in 2008. However, there is still a hint from places like the World Gold Council that investors who look to precious metals for investment are looking at buy and hold, not a quick turnaround. There will probably always be people looking to cash in at higher prices, but there can be an expanding core of willing buyers who aren’t ready to call a top in either market. There could still be strong support found in both gold and silver, at least until the global economy improves.

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If you walk around the streets in nearly any American city you'll see signs -- sell us your gold. The public is in there selling their gold, selling gold jewelry, as fast as they can. Jim Rogers interview, December 2010


Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.