Gold, silver risk further price correction

In recent months, gold and silver prices zoomed on the back of investor interest that resulted from a highly supportive macro-environment – easy money, weak dollar, geopolitical instabilities, weak equity markets, inflation expectations and so on.

The fact that the two precious metals outperformed other asset classes fanned further investor interest. There was also extraordinary hype in the media about investment in gold.

While gold reached record levels, crossing the psychological $1,500 an ounce barrier, silver outperformed the yellow metal by rising to a three-decade high and threatening to breach the landmark $50-an-ounce.

In recent days, there has been a price decline. While gold corrected, silver prices collapsed from their record levels, losing almost a third of the value in a handful of trading sessions.

What does the future hold for gold and silver? Will investors continue to bet on gold and silver prices? Many analysts continue to stay bullish, suggesting that while in the short-term there will be correction in the long-term the sentiment is bullish.

Contrarian view

A somewhat contrarian view that many not be palatable to gold bulls comes from London-based Natixis Commodity Markets Ltd, a brokerage firm providing price risk management services, in its latest metals review. The company said there are a number of factors that should make one cautious towards the outlook for gold prices, the most important being the potential for higher interest rates in most key regions.

Although this trend has been in place among developing countries for some time (China and India, for instance, regularly tighten money supply), more recently ECB has begun to hike rates. The end of QE2 may also boost interest rates in the US.

“This would raise the opportunity cost of holding a low-yielding asset such as gold, as well as potentially strengthening the dollar,” the report pointed out, adding that the bottomline is that one of the key drivers behind the rapid expansion of high powered money may be coming to an end.

Natixis is projecting an average annual gold price of $1,490/oz in 2011. With the prop of investment inflows potentially much reduced in 2012, there is scope for gold prices to drop further. So, the forecast average price for next year is $1,290/oz. “This implies a move towards, or perhaps below, $1,000/oz at some stage during this period,” the report said.

Silver may trend down

As for silver, the company said with the expected correction in gold during the middle part of the year, silver may continue its recent decline below $35/oz, while support at $30 is likely to hold in the near-term. For the year as whole, the average price of silver would be between $35 and $36/oz.

Without ruling out an alternative scenario, Natixis has said that if global high powered money can continue to expand rapidly, and the US interest rates remain abysmally low, prices can continue to inflate for an extended period. “The major risk is that the recent corrections in both silver and oil markets are harbingers of things to come, in which case prices could fall further, and faster, than we can anticipate.”

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