'Devil's metal' burns investors as gold melts down

Gold melts down as 'devil's metal' burns investors
Gold melts down as 'devil's metal' burns investors   

Gold and silver have been crushed this week, burned by the rising dollar and the outflow of money looking for a home in stocks and other investments.

Some analysts said the metals look like they should be close to a floor, but they stop short of calling a bottom based on the factors that are driving prices lower, including ETF withdrawals. Even a rush of coin buying, causing the U.S. Mint to temporarily run out of silver American Eagle coins, hasn't yet turned the tide,

"I've been pretty morose on gold for quite some time. Maybe it's a little bit lower than we would have thought. ... We had a one-two punch and a knockout," said Bart Melek, head of commodities strategy at TD Securities. He said the hawkish tone of the Fed last week helped send gold reeling, and any positive moves in the dollar add to its decline.

"It's not likely we're going to see an outright rout at this point. We're kind of holding on key support levels. I think it will very much depend on how equity markets do and how the economy looks."

The December Gold contract on Wednesday ended about 2 percent lower at $1,145.70 an ounce, and is now off more than 6.5 percent in the past five days.

Molten gold pours from a crucible into a heated mold after refining at the Kaloti Jewellery factory in Sharjah, United Arab Emirates.
Duncan Chard | Bloomberg | Getty Images
Molten gold pours from a crucible into a heated mold after refining at the Kaloti Jewellery factory in Sharjah, United Arab Emirates.

Silver is even weaker, and Melek said it could fall into the $14.50 zone. Silver is down more than 10.5 percent in the same time, and the December futures contract settled down 3.5 percent on Wednesday.

Gold is down 11 percent in the past three months, and silver is down 22 percent.

"It's even more slaughtered. Although the fundamentals of silver are much stronger than the fundamentals of gold, who cares? The only thing that matters is what the dollar is doing. Money still wants to flow to stocks and that's what it will continue to do," said Dennis Gartman, publisher of the Gartman Letter.

Silver is much more volatile than gold and can lead prices higher, but also lower as it is doing now. "It burns investors. That's why they call it the devil's metal," said one analyst.

Gold also has been selling off as the world appears to be more concerned about disinflation than inflation, with weaker economies and the drop in crude. The dollar index is up 1.7 percent in the past five days. "The strength in the dollar is so substantial. The crude market weakness is so substantial. Where else can it go? It will keep going until it stops. It's a bull market for the dollar, and that trumps all other concerns," said Gartman.

George Gero at RBC, said gold is also a candidate for tax-loss selling and it has been swept lower as investors bail out of commodities funds.

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"For now, it's going to take some time to break the technical damage," he said. Key levels were $1,180 and $1,150. "The next one would be $1,100 and there are a lot of $1,100 and $1,050 puts being bought on the exchange," Gero said. "$1,000 is kind of far away and $1,000 is only $200 over the cash cost of mining so it's doubtful you're going to see that sort of a price."

But Melek said a dip to $1,000 is possible.

"At this point, it's certainly a possibility but will it stay there is another question. The way it looks it certainly is possible but several things would have to happen. You'd have to have very strong numbers and probably at the same time you'd have to have the ECB do something similar to what the Bank of Japan has done, an unexpectedly aggressive (stimulus) program," said Melek.

The ECB meets Thursday and is not expected to make any alterations to its easing program at this meeting. Melek said the U.S. jobs report could slam gold if it is very strong, boosting the dollar.

The weakness in Chinese data has also hit gold and other metals, and Melek said the spread between London gold futures and Shanghai remains negative and has been for months. Gold prices tend to trend higher in China particularly heading into the winter.

Jim Steel, chief commodities analyst at HSBC, said his average target price for gold next year is $1,180.

"It's fragile but we're going to have to see what the ETFs have done today, and I'd like to see overnight," he said. "My sense is the market has become oversold. That doesn't mean it can't drop any further."

He said the coin buying was a good sign for demand pickup, "Coin buying is a very good sign for retail buying," Steel said.

"It's a good sign retail interest is getting very strong for gold and silver. It doesn't mean it won't go down further, but it's a sign of physical response. I suspect we'll see a price response in the Asian market to this," Steel said. He said he expects jewelry buying will also be helpful.