Gold and Silver Fail to Find Upside

NEW YORK (TheStreet ) -- Gold and silver were getting pummeled Tuesday on a stronger U.S. dollar and a surprise rate hike in India.

Gold for June delivery was down $13.90 to $1,543.20 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,551.40 and as low as $1,516.20. The spot gold price was flat, according to Kitco' gold index.

Silver prices were falling another $2.43 to $43.65 an ounce. The CME has raised margin requirements again for silver by another 11.6%, the third time in a week. It will now cost a trader $16,200 to buy a 5,000 ounce contract, the move will go into effect Tuesday after market close and leveraged traders could be dumping positions to avoid having to pay more for silver.

In stark contrast, it only costs $6,751 to buy a 100 ounce gold contract, which at current prices is worth $154,300 while silver's is worth $222,350 an ounce.

In the latest commitment of traders report ending April 26th, speculative long positions in silver sunk 10.8% while short positions jumped 24%. For gold, speculative longs sunk 5% and short positions were flat as more traders bet against the rise in the silver price.

Both gold and silver were struggling Tuesday as the ratio between the two metals continues to adjust now at 35 versus 31 when metals were at recent highs.

Mark Johnson, co-manager of USAA Precious Metals and Minerals Fund, thinks the gold/silver ratio should be closer to 60 rather than 30 and only has a 0.5% position in silver. "Five months ago [we had] 8% silver and now [we have] less than 0.5% in silver." If the ratio got to 60:1, Johnson would get interested in the metal again.

"Gold will do better," says Johnson, who thinks that recent silver mines will ramp up supply so fast that it will overtake demand. "We view volatility [in gold] as an opportunity ... [during] significant downward moves we are in there buying"

Leading the charge against gold and silver today is a stronger U.S. dollar with the U.S. dollar index adding 0.12% to $73.15 and a surprise rate hike in India.

India raised rates by 50 basis points to fight inflation, currently at 8.89%, with the overnight lending rate at 7.25%, but negative real interest rates still persist.

Australia's central bank also warned of rising inflation but took no rate hike steps and the heat mounts for the Bank of England and the European Central Bank when they meet on Thursday. With growth and manufacturing activity in England anemic, at best, no rate hike is expected and the ECB, which raised rates 25 basis points at its last meeting, is not expected to raise rates at consecutive sessions. Nevertheless, hawkish commentary should emerge with inflation in the UK at 4% and the EU at 2.7%.

"Gold and silver are ... in much need of a bout of consolidation," says James Moore, research analyst at FastMarkets.com, "with silver particularly vulnerable to long liquidation ... But, with real-interest rates still largely negative, the rise in terror concerns and ongoing issues, gold is more likely to be cushioned." Many experts are still waffling on trying to find a range for silver but think that $1,500 is a good support level for gold.

One puzzlement in the gold community is the lack of leverage gold stocks currently offer. Monday when gold rallied intra-day almost $20, Barrick Gold(ABX), for example, ended the day down 2.67%. So either the gold stocks are a leading indicator of a further selloff in the gold price or the days are gone when gold stocks provide 2:1 leverage.

Johnson thinks that the leverage will come back as input costs, particularly oil, stabilize but the gold price moves higher. "They do de-link ... oil stabilization [is] a catalyst for the gold price." Johnson lists Iamgold(IAG) as his favorite gold stocks.

Other analysts think that once companies report first quarter earnings and deliver good production, manageable cash costs and free cash flow, that markets will respond accordingly.

Leo Larkin, equity analyst with Standard & Poor's, who follows Barrick, Newmont Mining(NEM) and Randgold(GOLD), says that investors would just rather buy the physical metal or the SPDR Gold Shares(GLD) rather than be exposed to the risks of miners.

"The ease to which you can gain exposure from the GLD [is] detracting from investing in the stocks." Larkin says good cash flow hasn't made a difference for the stocks in the past and that, in general, earnings are looking good for most companies with good production and cash flow.

Some companies might be forced to ramp up their dividends to attract investors but that in the end "if the gold price really starts to accelerate and input costs don't go up as much as the price of gold ... then you might finally see the stocks react," says Larkin.

The immediate worry is that gold stocks are foreshadowing lower gold prices, but Larkin says "[it's] a different environment" with more physical buying of gold and more companies offering gold storage. Larkin has no affiliation or ownership in any of the stocks he follows.

Gold mining stocks closed mostly lower Monday. Barrick Gold was down 2.67% to $49.65 while Newmont lost 1.77% to $57.57. Other gold stocks, Randgold and AngloGold Ashanti(AU)closed at $83.75 and $50.39, respectively.

(Source: http://www.thestreet.com/story/11103387/3/gold-and-silver-fail-to-find-upside.html)