Christopher F. Davis
Disclosure: I am short GLD
Prices of gold are now down almost 26% since hitting an all-time high of $1,920.80 an ounce in September 2011. Silver is now down 53% from its April 2011 highs of $49.51. Copper has also been very weak, plunging 25% from a recent February 2012 high of $3.98 a pound. This price action has sparked fears that the bull market in metals, particularly gold and silver, is coming to an end.
Investors have been bailing out of the SPDR Gold Trust (GLD) and the iShares Silver Trust (SLV). The GLD is trading at $135.47, whereas the SLV is trading at $22.40. They are now down 16.4% and 23.8% in 2013, respectively. The Copper ETN (JJC) has lost 15% year to date, trading at $39.18. This article will review the recent price action in the metals and fundamental reasons for the selling, as well as provide key data points to watch next week that could move prices further.
Gold ended Friday’s session higher, as investors and bargain hunters came to the market seeking deals, with some traders likely believing prices fell too far too fast. Furthermore, there is mounting physical demand in both Asia and the U.S., which also helped contribute to gains as large buy orders were likely placed to take advantage of the depressed prices. Gold futures plunged to the lowest level since January 2011 last Friday (April 12) for fundamental fears followed by technical and panic selling that kicked in Monday (April 15) after prices broke below key support levels. Gold prices have a low-end near-term support at $1,322 per ounce, the low from April 16.
The action of last week suggests some of the fundamentals related to bargain hunting and those seeking long-term insurance are in play. Gold gained each day last week from Tuesday to Friday. However, despite Friday’s (April 19) strong performance, gold futures lost 5.4% on the week, marking the fourth consecutive weekly decline. In the trading session, Comex gold for June rose to a session high of $1,424.55 an ounce, but prices failed to hold these strong gains. Prices steadily declined through the day to close 0.8% higher on Friday at $1,403 an ounce.
Silver dropped to a low of $22.01 per ounce on April 16 following gold’s sell-off, touching levels not seen in nearly three years. Silver slowly saw some bargain hunters come in this past week. Silver for May closed on Friday to settle the week at $23.19 per ounce, gaining 5% from the lows. However, silver futures prices lost 10.5% on the week, marking the sixth consecutive weekly decline. Some of this decline has been attributed to weaker-than-expected industrial demand and mixed sentiment regarding the metal as a safe haven like gold.
Despite this sentiment, buyers have been pouring money into physical bullion. In fact, demand for physical silver has been so strong that two of the United States largest wholesalers have completely sold out of physical silver. This has resulted in premiums rising sharply for bullion, most notably on the 2013 American Silver eagles. Still, short interest remains at record highs. This could pressure silver further. On the other hand, a spike in the price this week could result in short covering leading to a short squeeze rebound.
Copper futures have been under heavy selling pressure in recent sessions as global growth concerns and worries over a slowdown in demand. Copper has been weak for several months now. This past Friday, May copper tumbled 1.7% on Friday to close the week at $3.150 a pound, and lost nearly 6% on the week. Prices of so-called “red gold” are now down more than 20% in just over a year, officially in bear market territory along with gold and silver.
Sentiment on gold and silver has been very bearish because of beliefs that the Federal Reserve could end its quantitative easing soon. Furthermore, the recommendation from Goldman Sachs a few weeks ago to outright short gold weighed heavily. Price target cuts from a slew of banks and analysts added to the negative pressure. News that Cyprus was contemplating selling several tons of its gold reserves to raise funds for its bailout also hurt sentiment. Selling this much gold would certainly move the markets a bit, but the possibility of the sale raised concerns other debt-ridden European governments would be forced to do the same.
In the week ahead, we will all be awaiting Friday’s U.S. data on first-quarter growth. This is a critical data point to gauge the strength of the U.S. economy. A poor number could spark some buying in the metals as it could lead investors to believe the Federal Reserve will not take their foot off the metaphorical accelerator pedal. However, any strong improvement in the U.S. economy could easily have the opposite effect. This is especially true given that moves in gold and silver this year have largely tracked shifting expectations as to whether the U.S. central bank could bring quantitative easing — one of the biggest boosts to gold’s bull run — to an end this year.
Copper, on the other hand, could do well on a strong number, as a growing economy generally needs copper to build, repair, and expand existing infrastructure. On that note, I think listening to some of the homebuilding company conference calls is important, given the amount of copper utilized in homebuilding. Overall, I am bullish long term on these three metals, particularly silver given its unique characteristic as an industrial and precious metal. Investors for the long term sho