What Next For Gold And Silver After A 2 Month Rally?

Includes: GLD, SLV
by: Tim Iacono

Precious Metals Weekly Market Wrap

The gold price rose again in August, following up a 10 percent gain in July with an increase of 6 percent last month, however, precious metals are still working their way out of very deep holes in 2013. On Wednesday, gold rose above $1,430 an ounce for the first time since May as silver approached the $25 mark for the first time since April, but both metals gave back these gains later in the week as the dollar strengthened.

Ongoing short-covering and safe haven buying due to developments in Syria have been two of the key drivers for rising gold and silver prices in recent weeks. When combined with positive technical factors that developed in mid-August, an increasing number of analysts have become bullish on precious metals again and this view appears to be shared by U.S. money managers who added to their gold ETF holdings for the third straight week.

Central banks bought more gold and, despite the best efforts of the Indian government to curb gold demand there, the Indian people continue to buy more of the yellow metal as we enter the seasonally favorable months of the year when Asian demand normally increases.

For the week, the gold price fell 0.1 percent, from $1,398.10 an ounce to $1,396.50, and silver fell 2.3 percent, from $24.09 an ounce to $23.53. The gold price is now down 16.6 percent so far in 2013, some 27.4 percent below its record high of over $1,920 an ounce two years ago, and silver has fallen 22.5 percent this year, now 52.5 percent below its all-time high near $50 an ounce in early-2011.

Precious metals reversed course beginning at mid-day on Wednesday after a five-day rally that took the gold price up from the mid-$1,300 range to nearly a four-month high at $1,433 an ounce. During that same run-up, silver jumped more than 10 percent, but in a timely reminder that the silver price moves down as fast as it moves up, more than half of those gains were surrendered by the time markets closed on Friday.

To be sure, gold and silver have now reached critical junctures after an impressive rally that began over two months ago, one that turned bearish technical factors into bullish ones.

Safe haven buying leading up to U.S. military action in Syria has also played an important part in spurring recent demand as has the growing concern over the lack of action in Washington to raise the U.S. debt ceiling.

Bearish factors include the possibility that precious metals are overbought, having come "too far, too fast", and that Federal Reserve "tapering" of their money printing effort later this month could roil all markets.

In short, the next move for gold and silver could as easily be up as down.

While there is uncertainty about the short-term, the long-term picture seems clearer than it's been in many months. As shown below, it appears the current major gold market correction is now playing out much like the major correction that occurred during the last secular bull market in the mid-1970s.

(Click to enlarge)

Moreover, it is all but certain that the late-June lows marked the end of the downturn. A 2008-style market meltdown this fall could send gold and silver prices sharply lower temporarily (particularly silver), but a return to a three-digit gold price and a sub-$20 silver price now seem highly unlikely.

Some central banks appear to have timed the bottom of the gold market rather well in recent months as new data from the IMF (International Monetary Fund) showed a total of 15 nations added to their gold reserves in July. Turkey added 22.5 tonnes and Russia bought gold for the 10th straight month, adding 6.3 tonnes to their gold holdings that moved past the 1,000 tonne mark for the first time in at least 20 years.

In India, the gold price jumped to a new record high in local currency terms as the rupee sank to an all-time low against the U.S. dollar. As detailed last week in Indian Rupee Crisis Now Even More Comical, the Indian government recently floated an idea to buy gold from the Indian people in order to sell this gold back to the Indian people and, as a result, lower their gold imports, narrow their trade deficit, and bolster their currency.

Good luck with that ...

They are likely to be more successful in pledging some of their central bank gold for an IMF bailout, as currently speculated.

Elsewhere in Asia, rising prices appear to have quelled the demand for gold as evidenced by falling premiums. Reuters reported that premiums in Hong Kong declined from $5 per kilo bar two weeks ago to just $2.50 and that premiums in Tokyo and Singapore are down by two-thirds.

There has been much talk about entering a "seasonally favorable" time of the year for gold demand in Asia, however, given what has transpired in markets this year (i.e., record demand in the spring and summer when buying in India and China usually declines) strong demand from Asia in the months ahead is not assured, particularly when considering that the gold price is now $200 an ounce higher than it was over the summer.

But, the good news for investors in gold and silver is that metal prices are set in the West, not the East, and U.S. money managers are warming up to this sector once again.

Holdings for the SPDR Gold Shares ETF (NYSEARCA:GLD) and the iShares Silver Trust ETF (NYSEARCA:SLV) are seen as an indication of sentiment toward precious metals in the West and the fact that holdings for both of these ETFs have now risen for three straight weeks is significant.

Some 45 tonnes were added to the SLV trust last week that is now 515 tonnes higher than where it began the year despite the silver price being down more than 20 percent.

More importantly, GLD followed up weekly additions of 4 and 5 tonnes with a one tonne increase last week as shown below.

(Click to enlarge)

These inflow amounts are still small and it will take a few more weeks or so to confirm this trend change, but it is increasingly likely that the gold ETF selling in the U.S. is now over.

This more positive view of precious metals in the West was clear to see in a number of recent bullish reports by analysts.

Chief among the current gold bulls is Citigroup's Tom Fitzpatrick who, in a Bloomberg interview said the gold price could end the year above $1,500 an ounce. In another interview last week with King World News, Fitzpatrick discussed the long-term gold price trends and cited the similarities to the 1974-1976 gold market (see chart above) before predicting that the gold price will rise as high as $3,500 an ounce in the years ahead and silver will top $100 an ounce.

Not to be outdone, Societe Generale strategist Albert Edwards predicted that the gold price will surge to $10,000 as the ten-year Treasury yield falls below one percent and the S&P500 drops by 73 percent to just 450. Edwards has had the same bearish call on U.S. stocks for a few years now but, interestingly, both Fitzpatrick and Edwards see a dramatic asset allocation change that would favor gold and see equities move much lower.

A much more conservative outlook on the gold price was provided by BMO commodity strategist Jessica Fung who said that geopolitical events and developments related to the U.S. debt ceiling should "provide support to precious metal prices" at current levels.

Disclosure: I am long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I also own gold and silver coins and bars.