Precious Metals Markets Are Quiet ... Too Quiet

Includes: GLD, PSLV
by: Tim Iacono

For the third straight week, precious metals prices ended not far from where they began, spot gold rising about $10 an ounce and silver up just two cents an ounce, as traders await cues about which way prices might go after an impressive run-up in August and September.

Meanwhile, long-term investors around the world continue to accumulate gold and silver, pushing ETF holdings to new record highs, as we draw closer to November, what has been the very best month of the year for precious metals during the current 12-year old bull market as shown here last week.

For the week, the gold price rose 0.6 percent, from $1,771.10 an ounce to $1,781.30, and silver rose two cents, from $34.49 an ounce to $34.51. Gold is now up 13.7 percent for the year, down 7.4 percent from its high last fall, and silver is 23.9 percent higher in 2012, down 30.3 percent from its high 18 months ago.

There's been a clearly discernible "eerie calm" over financial markets in recent weeks, that is, since Federal Reserve Chairman Ben Bernanke launched the latest round of central bank money printing on the morning of September 13th. In addition to the tiny weekly moves in precious metals markets as noted here recently, there's been a truly remarkable lack of overall movement in other major asset classes since the Fed's announcement.

Since rising to the mid-$30 range in early September in advance of the Fed announcement, spot silver has seen weekly closes at $34.52 an ounce, then $34.49, and, last week, $34.51.

The gold price closed at $1,770 an ounce on September 13th, then $1,770.50 to end the week the next day, before going on to weekly closes of $1,773.00, $1,771.10, and, then last week's $10 move.

The S&P500 Index closed on Friday at 1,460.93, less than one point above the September 13th close of 1,459.99 and, what is perhaps most incredible about asset prices lately is that the silver price is almost exactly where it was just minutes after the Fed announcement three-and-a-half weeks ago at $34.50 as shown below, having closed within pennies of that mark for three straight weeks.

(Click to enlarge)

It's hard not to get the feeling that this is an increasingly tense game of musical chairs where the music has been playing for a very long time now and all the players (i.e., traders) are looking anxiously at each other with everyone anticipating that the music will soon stop

Last week's market action was typical of what has happened since the middle of last month as metal prices were bid higher early in the week, in what was reportedly a rush of hedge fund buying after stellar third quarter performances by gold and silver.

Then prices faded, then they rose again on Thursday, leading to an 11-month high for gold just shy of the important $1,800 an ounce mark, before priced faded again, ending the week little changed.

Late in the week, open interest in U.S. gold futures rose to its highest level in a year, holdings at the SPDR Gold Shares ETF (NYSEARCA:GLD) rose to a record high of 1,333 tonnes, and the premium for the Sprott Physical Silver Trust (NYSEARCA:PSLV) jumped to near a three-month high of 4.8 percent.

The better-than-expected labor report on Friday is said to have removed some of the urgency in the Fed's latest money printing gambit with the $1,800 mark now seeming to be just a bit further out of reach, but, it's hard not to get the feeling that something is about to break loose here, the direction being uncertain.

One thing that does seem certain based on recent data collected by the folks at BullionVault and shown below is that it is not retail investors who drove metal prices higher over the summer.

(Click to enlarge)

This is an interesting index that gauges net buying and selling by BullionVault customers - a reading of 50 indicating an equal amount of purchases and sales - and, when laid up against the price of gold, it's clear to see that small investors are followers, not leaders, at least during the final stages of a sustained price increase.

Hedge funds trading in futures markets clearly drive prices in the gold market, however, as seen in the data from a year ago (that is, if the BullionVault data is representative of small investors in general), retail investors can provide key support at times.

In other news last week, Singapore is bidding to become what one newspaper called the "Fort Knox of Asia" by scrapping taxes on gold and silver, a move that is aimed at making the city a precious metals center for the wealthy.

In India, gold demand remains weak in the aftermath of a series of higher taxes and duties levied earlier this year along with a concerted effort by the Indian government to reduce demand, gold imports being a key driver in a widening trade deficit that has resulted in a weak currency (and, ironically, higher gold prices since there is no domestic source of production). Though there has been a modest rebound in demand in recent weeks, BNP Paribas analysts cited the above factors in a research note last week before concluding that Indian gold demand will not rise for two years.

More bullish precious metals forecasts were released by investment banks around the world highlighted by Blackrock analysts who cited central bank money printing as the key reason for the gold price to rise as high as $2,400 by next summer. Deutsche Bank predicted that the gold price will average $2,113 next year and silver will average $44 an ounce, representing gains of 19 percent and 27 percent, respectively, from today's prices.

These seem like reasonable expectations for next year, though, as I've been saying recently, we're more likely to see a correction than higher prices in the weeks ahead.

November, however, could be an entirely different story as sharply higher prices for gold and silver may develop as extremely positive seasonal factors combine with growing concern about the fast approaching "fiscal cliff" that could lead to a much weaker U.S. dollar.

Disclosure: I am long GLD, PSLV. 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

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