The lack of any substantive action by central banks in Europe and the U.S. to provide additional near-term monetary stimulus sent precious metals prices sharply lower at mid-week and, while renewed prospects for faster growth (and the possible threat of higher inflation) after two positive economic reports released on Friday boosted both gold and silver, it was not enough to offset earlier losses.
So far at least it appears that the gold price breakout that developed in late-July (as detailed here a week ago) may be nothing more than the continuation of the trading range that has been in place for more than three months, however, analysts are still bullish about higher metal prices later this year.
For the week, the gold price fell 1.2 percent, from $1,623.60 an ounce to $1,603.60, and spot silver rose a penny, from $27.79 an ounce to $27.80. Gold is now up 2.4 percent for the year, down 16.6 percent from its 2011 high, and silver is just 6 cents lower in 2012, down 43.8 percent from its peak last year.
The gold price gave back all of its $40 gain from the week prior after ECB (European Central Bank) President Mario Draghi failed to announce any immediate plans to launch a new round of money printing aimed at purchasing Spanish and Italian debt, however, a weaker dollar and renewed appetite for risk on Friday helped make up half of that decline while the silver price saw an even bigger bounce, making it all the way back to about even for the week.
To be sure, after a long period of consolidation for "the poor man's gold", silver is due for a rebound and investor interest appears to be on the rise as the recent $200 million additional offering for the Sprott Physical Silver Trust (PSLV) was oversubscribed by more than $20 million.
Both Morgan Stanley and RBC Capital Markets exercised options to purchase additional units for their own accounts - a strong vote of confidence by these investment banks - and Sprott will use the proceeds to purchase, and take delivery of, approximately 250 tonnes of physical silver.
More silver showed up in the iShares Silver Trust ETF (SLV) that added 120 tonnes of the metal just last week as shown below per the iShares website. There have been small, steady inflows and outflows from the trust this year that, up until last week, had about offset each other, but last week's big addition puts the holdings up 150 tonnes so far in 2012 at 9,759 tonnes as compared to the current 1,200+ tonnes for PSLV.
In another sign of renewed interest in precious metals since the recent developments in Europe, the SPDR Gold Shares ETF (GLD) saw three tonnes added to it last week, but this comes after a decline of almost 30 tonnes in recent months.
Emerging market central banks also added to their gold holdings as a way to diversify away from dollar denominated assets, the Bank of Korea saying it bought 16 tonnes of the metal in July, its third purchase since last summer. This raises the bank's gold reserves to 70.4 tonnes, or roughly $3.5 billion, accounting for just 0.9 percent of its total reserves as compared to more than $300 billion in U.S. dollars or dollar denominated assets.
In a world of rising doubt about global currencies, it's important to note that raising its gold reserves to the 10-15 percent level favored by Western central banks would require the Bank of Korea to purchase hundreds more tonnes of gold and, what is perhaps most significant about their recent purchase, is that it was made at prevailing prices of almost $1,600 an ounce.
Central bank buying is one of the key reasons why there will likely be a solid floor beneath the gold price between now and the time that the Federal Reserve launches a new round of money printing or the trade-weighted dollar reverses course from its recent 15-month long rise, perhaps as a result of year-end wrangling about the U.S. budget troubles that, for years, have escaped the attention of currency traders who have been focused on Europe where yawning budget deficits are being actively (if unsuccessfully) addressed.
More Fed money printing was cited by UBS precious metals strategist Edel Tully last week when the bank raised its one month gold forecast from $1,550 an ounce to $1,700 and its three-month forecast from $1,600 an ounce to $1,750. She noted, "our one-month target coincides with the Fed's Jackson Hole symposium at the end of August, which we think will be significant for policy expectations ahead of the September FOMC meeting", echoing the view expressed by other analysts in recent months that investors may benefit greatly if they "buy gold ahead of QE3″.
Analysts at HSBC were even more bullish as they cited uncertainty related to the U.S. "fiscal cliff" late in the year and dollar weakness that could result, a theme that I've been harping on for a few months now (as detailed here recently). The bank said,
we retain our bullish view on gold for the second half of 2012, buoyed by official sector demand and our expectations of U.S. dollar weakness as the market becomes more fixated on the currency's value as the U.S. fiscal cliff story gains greater traction … We expect prices to rally to above $1,900/oz by the end of the year. Patience is the most important commodity.
That's been true for some time now - patience is important.
Additional disclosure: I also own gold and silver coins and bars.