Gold and silver prices encounter solid buying support

[Barron]

2012-MAR-08

The gold price has, as expected, encountered strong buying support on the recent forays below $1,700. Silver has again performed impressively after looking yesterday as though it might fall below support at $33. After going nowhere in trading yesterday morning, the metals received support in the afternoon following indications that the US Federal Reserve is planning a new form of quantitative easing.

And after the best part of two years’ worth of aggravation and worry, the Greek debt crisis looks as though it may be coming to a head tonight. The country’s private creditors have until midnight to decide whether or not to accept a €206 billion bond swap that would see them take a 53.5% “haircut” on the value of their debt.

In all likelihood, the deal will be done. This will probably mean that market attention shifts from the problems in the eurozone, which is supportive as far as precious metals are concerned, given that traders will be moving out of dollars and Treasuries and back into “risk” assets. Commodities and equities will also benefit.

Silver will outperform gold in such an environment; this could also be the case for the “industrial” precious metals (platinum and palladium) though of these four metals, silver clearly has the most explosive upside potential – given the right market conditions. The silver price has performed well since testing support at the $33 mark yesterday, and is now back above $34. Bulls will face resistance again at $35, but one or two shorts in the futures market may start to sweat a little if we get a convincing settlement above $35 so soon after last Wednesday’s sharp price correction.

The current rally in equities and commodities is of course intimately tied to the perceived health of the US economy. Tomorrow’s nonfarm payroll data from the US Bureau of Labor Statistics will provide important clues as to the direction of the US economy. Likely we will see further gains that outperform consensus estimates. At the same time, yesterday bought forth hints from the Federal Reserve that they will indeed be engaging in more “quantitative easing” – though in a newly disguised form. Supposedly, the Fed’s new approach will be a pain free method of greasing the liquidity wheels of the economy, without adding unduly to inflationary pressures.

How is this miracle to be accomplished, you might ask? By so-called “sterilized” purchases, whereby “the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates”.