Short squeeze fades in precious metals, contrarians spot time to buy

The price of both silver and gold slipped back in London on Tuesday morning, cutting into yesterday's rapid gains from four-year and one-month lows respectively.

World stock markets stalled after hitting a series of near and new all-time highs so far this month.

The British pound fell hard – supporting the gold price in Sterling above £910 per ounce – after new data showed a slowdown in consumer price inflation.

"These stunning upside reversals off fresh lows [in gold and silver] were somewhat justified," says a note from brokers INTL FC Stone, "given that both were quite oversold."

Monday's sudden leap in the silver and gold price, which took only a few minutes, was sparked by a "classic short squeeze" according to several analysts today.

Bearish bets in gold futures rose last week to a record holding for speculative traders, breaking 100,000 short contracts – which profit if prices fall – for the first time on record, according to US regulatory data.

Monday's dramatic $30 jump in the gold price equaled a 2.2% rise, but saw silver jump faster – up 3.9% in a matter of minutes.

Across in Asia, "Physical support for the price is currently huge," says another analyst in a note, "but will not last forever in our view.

Two weeks after both India's gold-buying festival of Akshaya Tritiya and tight restrictions on Indian gold imports, "There is no action in the market," said one Mumbai bank dealer to Reuters earlier.

"Everybody has stopped consignment imports. [So] premiums are still on the higher side in the domestic market" at up to $20 per ounce above the world's benchmark gold price for London settlement.

On the production side today, London-listed gold miner Petropavlovsk Plc – whose shares have lost two-thirds of their value since New Year, and whose executives have waived 2013 bonuses to help slash costs – extended the gold hedging program it began in February.

With output forecast around 21 tonnes for the next 12 months, Petropavlovsk has now hedged 15 tonnes of that gold, locking in a price of first $1,663 and then $1408 per ounce.

Forward sales by larger gold producers grew throughout the 1990s bear market. The industry's total "hedge book" reached more than 2,900 tonnes in 2001. Leading analysts GFMS said earlier this month they don't foresee a big move back towards gold hedging by miners any time soon.

As a sector, North America's major listed gold mining stocks have dropped half their value since the price of bullion peaked in September 2011.

The gold price today stood 28% lower from then, trading at $1,375 per ounce by lunchtime in London.

"We have been tempted [by gold mining stocks] for a long time," says Robin McDonald of Cazenove's $1.6 billion Multi-Manager Diversity fund, speaking to TrustNet, and "we saw the fall of 22% back in April as the right time."

Now adding Blackrock's Gold & General fund to his holdings, "People have become wholly disillusioned with the asset class," McDonald says.

"In my experience, when nobody has anything nice to say about an asset class,from a contrarian standpoint, it's time to buy."

Looking at silver bullion on Monday, Bank of America Corp's Michael Widmer in London told Bloomberg that "A lot of the investors who bought silver on a view of Dollar debasement or inflation picking up massively I think are now disappointed.

"The other point," Widmer added, "is that silver industrial demand in [this global] mood of subdued economic growth is not doing particularly well either."

Meantime in the stock market, investment bank Goldman Sachs has raised its target price for the S&P 500 index – currently at 1665 – to 1750 by year's end, with further advances to 2,100 in 2015.

"We forecast dividends will rise by 30% during the next two years," says Goldmans. "Further expansion [in the price/earnings ratio, with stocks rising faster than revenues] is possible if interest rates stay low, growth improves."

After holding U.S. interest rates unchanged between zero and 0.25% for the 53rd month running at the Federal Reserve's last policy meeting, central bank chief Ben Bernanke is due to testify Wednesday to the Joint Economic Committee of the Senate.

"Bernanke is unlikely to hint at a tapering of [quantitative easing] bond purchases," says today's Commodity Daily from the analysis team at Standard Bank in London, "which would be a positive for gold.

"Below $1,360 the metal represents a reasonable buying opportunity."

About the Author
Adrian Ash

Adrian Ash runs the research desk at BullionVault. Formerly head of editorial at Fleet Street Publications – London's top publisher of financial advice for private investors – he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to a number of investment websites.

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