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Precious Metals Weekly Market Wrap

Due largely to the dovish tone of Federal Reserve Chairman Ben Bernanke in testimony before Congress, gold added to its recent gains, however, the silver price declined as both metals could be range-bound over the near-term in thin summer trading. For gold, the $1,300 an ounce level now looms large after having been tested on multiple occasions in recent weeks and, for silver, another round number offers resistance at $20 an ounce.

A weaker dollar also boosted precious metals as the U.S. Dollar Index fell for the second week in a row after notching a multi-year high earlier in the month. The gold price often moves opposite the world's reserve currency and that has certainly been true this year as tumbling precious metals prices have been accompanied by a stronger trade-weighted dollar.

Physical demand for gold remains strong in China though the summer lull in India is proving to be more severe than usual. This comes after lower prices prompted surging demand earlier in the year that was then greeted by even more government moves to slow gold buying. In the U.S., investors continue to exit positions in gold ETFs while adding to their silver ETF holdings and ongoing backwardation in the gold futures market provides more evidence of the growing disconnect between "paper" metals markets and "physical" markets.

For the week, the gold price rose 0.9 percent, from $1,284.80 an ounce to $1,296.70, but silver fell 2.0 percent, from $19.92 an ounce to $19.53. The gold price is now down 22.6 percent so far this year, some 32.6 percent below its record high of over $1,920 an ounce almost two years ago, and silver has fallen 35.7 percent in 2013, more than 60 percent below its all-time high near $50 an ounce in early-2011.

Precious metals saw big swings on Wednesday beginning with the release of Fed Chief Ben Bernanke's prepared testimony early in the day that sent prices sharply higher.

But, shortly thereafter, when the question and answer session began, both metals tumbled as traders realized there was really nothing new being offered by the central bank.

In a continuation of their recently dovish tone, the Fed left open the option to increase or decrease their $85 billion per month money printing effort depending upon the economic outlook. The start of "tapering" for their bond buying is still expected to occur sometime in the months ahead, however, Bernanke made clear that this action is not "on a preset course."

Technical resistance at key levels was also a factor in last week's price action as heavy selling was seen when gold approached $1,300 an ounce and after silver briefly topped $20 an ounce. As has been the case since the April sell-off, rallies have been sold as rising prices have prompted quick profit-taking by short-term traders and this will likely continue until resistance levels (that were once support levels) give way.

The bias for both metals remains decidedly down, that is, until gold trades over $1,300 an ounce and silver can stay above $20 an ounce. It's worth remembering that two big investment banks that were instrumental in shaping the attitudes of traders and investors toward precious metals earlier in the year both see much lower prices ahead. Goldman Sachs sees the gold price ending this year at just $1,050 an ounce and Credit Suisse forecasts an average gold price of $1,150 an ounce a year from now.

One potential catalyst that could reverse the recent price weakness and push gold and silver sharply higher later this year is the growing disconnect between the paper futures market and the physical market that has resulted in persistent and growing gold backwardation. Strong demand for the physical metal around the world has resulted in record deliveries from the Shanghai Gold Exchange and tumbling inventory at the COMEX in New York which has caused later-date gold futures contracts to trade at a discount to the spot price.

In January, gold was in backwardation relative to the three-month futures contract and according to this Reuters report on Friday, this is now moving out the futures curve. This condition was last seen during the financial crisis of 2008 and, since there is no similar "flight to safety" today, this raises important questions about the availability of metal for delivery amid record inflows of gold to mainland China and still elevated premiums in Asia.

Metal prices are set by futures traders who are fixated on short-term chart patterns that have been bearish since the April sell-off. Someday, the fundamental factors of supply and demand will again matter and that day may be hastened by concern over availability of the physical metal.

In recent months, China has played the most important role in physical gold demand as it was reported last week that physical gold delivery in Shanghai rose to nearly 1,100 tonnes during the first half of the year, just shy of deliveries for all of 2012 and more than double the nation's annual gold production.

A report from Russia last week suggested that China may someday back its currency with gold and this only adds to the growing speculation about how much gold China's central bank has quietly accumulated in recent years. Recall that, in 2009, China told the world it had nearly doubled its gold holdings over the prior six years and they are believed to have dramatically increased their gold reserves since then.

The Indian government stepped back from the brink last week in their increasingly desperate attempts to curb gold demand when they ruled out a complete ban on gold imports, at least temporarily. After surging to record highs in the spring, gold imports plunged 80 percent in June, however, wedding season buying will soon begin and gold imports are expected to rise again. India doubled the import duty to 8 percent earlier this year and restricted gold financing while some major banks have stopped selling gold coins and bars, efforts all aimed at reducing the nation's trade deficit.

Here in the U.S., investors appear to be exchanging shares of gold ETFs for silver ETFs as holdings at the former continue to fall as they rise at the latter. Last week, the SPDR Gold Shares ETF (NYSEARCA:GLD) saw its holdings decline for the 29th time in the last 31 weeks as another 6.6 tonnes exited the trust.

This brings the total outflows since last December to a stunning 420 tonnes, a decline of 31 percent that is comparable to the decline of 25 percent in the gold price since that time.

Holdings at the iShares Silver Trust ETF (NYSEARCA:SLV), however, continued their recent ascent as shown below, rising another 99 tonnes last week and now up more than 200 tonnes so far in 2013.

(click to enlarge)

As detailed recently in The Curious Case Of Physical Demand For Silver Versus Gold, this has been one of the more interesting developments in precious metals markets as SLV holdings are now up 2 percent this year while the silver price has tumbled 36 percent.

Ongoing strong demand amid tight supply for Silver American Eagle coins all across the country as detailed in this report by Patrick Heller at Numismaster only adds to the many questions about the disconnect between pricing in "paper" metal markets and "physical" market demand.

Fed Chief Ben Bernanke was queried about precious metals prices during his appearance on Capitol Hill last week and this produced a few interesting comments from someone whose tenure as Chairman has been very good for gold. Recall that the gold price was under $500 an ounce when Bernanke was nominated to run the central bank in October of 2005 and it had nearly quadrupled before beginning a correction in late-2011.

During questioning from the Senate Banking Committee, Bernanke noted the following:

Gold is an unusual asset. It's an asset that people hold as sort of disaster insurance. They feel if things go really badly wrong, at least they'll have some gold in their portfolio.
...
One reason gold prices are lower is people are less concerned about extreme outcomes, particularly negative outcomes, and therefore they feel less need for whatever protection gold affords.
...
Nobody really understands gold prices and I don 't pretend to understand them either.

It seems to me that someone should have asked him about the record gold demand in Asia after prices fell and the disconnect between "paper" markets and "physical" markets as evidenced by record demand for silver coins in the U.S. Clearly,a lot of people still think they need "insurance".

Source: For Gold, $1,300 Level Looms Large

Additional disclosure: I own gold and silver coins and bars.