Amid steadily deteriorating sentiment in precious metals markets in recent weeks, Friday turned out to be a very good day for spot gold and silver prices as the former jumped 3.0 percent (or nearly $50 an ounce) while the latter surged 4.4 percent (or $1.17 an ounce), both metals bouncing off of dangerously low levels seen on Thursday prior to the big announcement from Europe about the latest plan to rescue the common currency. This one being perceived as more credible than previous ones over the last two-and-a-half years, for the time being at least.
Along with owners of other risk assets, precious metals investors were no doubt relieved to see prices move higher as gold ended the week with a gain of 1.7 percent, up from $1,572.30 an ounce to $1,599.10, and silver jumped 2.2 percent, from $26.90 an ounce to $27.49. At the mid-way point in 2012, spot gold is now up 2.1 percent for the year, down 16.8 percent from its high of over $1,920 an ounce late last summer, and silver moved back toward even for the year, now down 1.3 percent in 2012 and 44.4 percent below its peak from April of 2011.
On Thursday, the silver price reached a 19-month low at just over $26 an ounce and much was made of the metal's recent downward spiral as the price dipped beneath the low of $26.30 an ounce from late-December. To find a lower price than that seen on Thursday you'd have to go back to November of 2010 when silver was pushing through the $25 range, up from about the $18 level where it spent most of its time that year.
The Wall Street Journal carried the story Silver's Slide Riles Bulls and Bears on Thursday that, as is usually the case from this newspaper, was an even-handed account of the prospects for silver in which two major factors were cited in determining which way prices will go. First, the perils of sell orders being triggered on a dip below the $26 an ounce mark and, second, the fact that silver remains a monetary metal and will rise and fall along with the gold price during an era of money printing unparalleled in the history of the world.
As I've noted many times before, if you're invested in silver, you should be more concerned about the price of gold since, absent any new revelation of market rigging that would push the price sharply higher, silver is not likely to move back toward the $40 an ounce mark unless the gold price stages a similar advance, as was the case back in February when gold approached $1,800 an ounce.
As for gold, another test of the mid-$1,500 an ounce range has come and gone with the metal returning to near $1,600, though, without the news from Europe on Friday that resulted in the flipping of the switch from "risk off" to "risk on", it may have been an entirely different story.
As shown below, even after Friday's big move, the ongoing gold price correction is now behind both the pace set during the 2006 and 2008 corrections, some 16 percent below its former high at the 217 day mark.
This is no cause for alarm, but, it bears close watching as we move further into the second half of the year.
Note that in both the 2006 and 2008 corrections it took well over 300 trading days for the gold price to recapture its previous high and I'm confident we'll see new all-time highs for the metal before year end, that is, when attention turns away from Europe and to budget troubles in the U.S. as our "fiscal cliff" approaches and elected officials "kick the can down the road" again.
But, between now and then, it could be rough going for gold investors as Friday's rally may be short-lived. To be sure, it's a good thing that the Chinese continue to buy gold and that central banks are stocking up on the metal at the fastest pace in decades because U.S. demand has waned, the U.S. Mint reporting last week that American Eagle gold coin sales during the second quarter fell to 127,500 ounces, the lowest since before the 2008 financial crisis.
In India, gold coin sales could face stiff headwinds from central bank measures to clamp down on commercial banks that collect high margins on these transactions. The Reserve Bank of India aims to change that by modifying bank regulations, part of an overall effort to reduce gold consumption that has been a major factor in the nation's widening trade deficit and plunging currency. India imports nearly all of its 900+ tonnes of gold per year and the government seems intent on reducing these imports, despite the cultural affinity Indians have for the metal.
The people of China and emerging market central banks continue to be the world's biggest source of demand for gold and, until investors in the West return to precious metals markets this fall for reasons cited above, gold and silver investors had better hope that the Chinese people and central banks keep buying.
Additional disclosure: I also own gold and silver coins and bars.