Gold and silver prices could come down in the short term - VM Group

London's VM Group, in its latest analysis of global metals markets, take a conservative view on gold and silver prices in the short to medium term

Author: Lawrence Williams
Posted: Thursday , 24 Sep 2009

LONDON -

In its latest commodities report the VM Group, which produces its Metals Monthly on behalf of BNP Paribas and Fortis Bank, is a little cautious on the immediate outlook for gold and silver, but seems to suggest that any short term downside is likely to be limited.

For gold the analysts feel that the metal has been helped by a plunging US currency, mining company buybacks and renewed investor demand, but on past performance they feel that a pullback may develop as investors take profits; however this could be relatively small, given that they point out that gold's gains have not seemed bubble-like and scrap supply is limited.

Indeed the longer gold actually stays above the psychological $1,000 an ounce level, the lower the chances of such a pullback developing and at the moment there does seem to be a degree of consolidation above that level - but supported by a relatively weak U.S. dollar - by 17th

September, for example, the analysts point out that the dollar was trading at 1.473 to a euro, compared with 1.390 in June, when gold reached $980/oz, its previous highest since February. Back then it hit $989/oz, with dollar/euro at just 1.284. The dollar's moves against most other currencies have been similar. So, in many currencies the February 2009 gold price remains the all-time high, even ahead of March 2008, when the dollar was also extremely weak (1.572 against the euro).

But, the US dollar is still about 10% up on the nadir of March and April 2008 and the analysts suggest that given the perceived turnaround in the U.S. economy there has to be a chance that the Fed will start raising interest rates again in the first half of next year and thus give the dollar a little more strength - which could be adverse for gold. If this idea on interest rate timing is correct, though, the strength or otherwise of the gold price in the meantime will obviously be key to where it will end if and when a change in interest rate policy comes into force.

Looking to the short term though, it is pointed out that Barrick's decision to cut 2.4 million ounces from its hedge book between the beginning of July and the 7th September - and that it would cut the remaining 3.0 million ounces within 12 months leaving it unhedged for the first time in 22 years, demonstrated that there are major factors in play affecting the gold price other than the dollar and inflation. If, the analysts point out, Barrick's buy-backs were mostly concentrated in August, or even September, then gold's recent sharp rally suddenly becomes far more explicable.

But gold has, so far, held onto its plus $1,000 price levels and every time it shows any weakness taking it below the $1,000 level it has immediately been countered with a move straight back up again. Speculators seem to be piling in, but even so the market doesn't appear feverish. The VM Group analysts thus feel that a limited pullback is the most likely short-term move, but in the mid-term a rally far beyond where we are today will largely depend on inflationary trends. They thus predict a pretty conservative short-term London pm fix in the range of $965 - $1,020 per ounce.

As to silver , the VM Group notes that it has made a remarkable comeback so far in 2009, although still remains well below its plus $20 highs of early 2008. Silver bulls - and there are plenty of these - will probably take this as a sign there are further gains to come. They might be right, the analysts conclude, but if gold does ease off, then silver will follow rapidly.

Silver is singing to gold that old refrain ‘anything you can do, I can do better' the analysts suggest. In the three weeks between 27th August-17th September gold's dollar price climbed 8%, impressive by any standard. Yet in the same period the silver price surged from $14.20 an ounce to $17.38 an ounce, an astonishing 22.3%. This knocked the gold/silver ratio down to 58.57, the most it has been in favour of silver since mid-August 2008. Yet, the analysts point out, a closer look reveals this is perhaps less impressive than it first appears.

Given the $20 an ounce price reached last year - and its current price vis-a-vis gold - silver could be seen as undervalued against gold - or perhaps it was overvalued in March 2008. The VM analysts reckon that the explanation is that this time last year silver plunged, when an outright global economic depression appeared a real possibility, and it has yet to fully recover. The dilemma is will silver play catch-up, or has it rallied too far, too fast? On a day-to-day basis, silver looks to gold for its direction, much more than to copper, or indeed any other commodity the analysts say. Silver tends to rally harder than gold when both are rallying, and it falls more when both are falling.

Silver is much more of an industrial metal than gold, but this fact, the analysts reckon, only seems to come into play at "pivotal moments", such as when silver collapsed dramatically this time last year. Thus they feel that if gold moves higher then silver will continue to outperform. On the other hand, a gold pullback, which is quite conceivable, should see it underperform.

Thus the overall outlook is seen as if gold goes down, so will silver, and by more. The analysts expect a retreat in silver prices in the short-term, but then further gains in the medium-term as gold resumes its upward path. Whether silver can take out its 2008 high of over $20/oz is debatable, however; at current relative prices it will probably require a gold price in excess of $1,100 an ounce which they believe not impossible, but unlikely in the short term. Consequently they predict a short-term London fix of between $14.50 and $17.50 an ounce - another fairly conservative forecast.