Gold Prices Stall, Silver Explodes

NEW YORK ( TheStreet ) -- Gold prices climbed higher and silver prices soared Thursday as investors bought the metals ahead of a long holiday weekend in the U.S.

Gold for June delivery added $4.90 to close at $1,503.80 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has hit another record at $1,509.60 while the spot gold price was up $4.30, according to Ktico's gold index.

Silver prices exploded $1.59 higher to close at another 31-year record of $46.05 an ounce, pushing the gold/silver ratio down to the 32 level. The lower the ratio goes the faster silver rallies versus gold. David Morgan, founder of Silver-Investor.com, thinks the ratio could hit 16 while Eric Sprott of Sprott Asset Management is on record as saying the ratio could hit single digits.

Gold rallied for a fifth straight day as the U.S. dollar index continued to tank losing 0.31% to $74.14 at its lowest level since November 2009 and is now trending towards it 2008 level of $72.

A weaker dollar makes gold and silver cheaper to buy in other currencies and dollar weakness also highlights the dollar-backed commodities' appeal as safe haven assets.

Mark Arbeter, chief technical strategist at Standard & Poor's Equity Research wrote in a recent note that the dollar could sink to its "2008 bear market lows ... and gold and silver will enter blowoff stages." Arbeter predicts that silver could spike to $65 while gold could hit $1,650-$1,800 an ounce "before this part of its bull market ends."

Traders are also positioning themselves for a long holiday weekend in the U.S. and might see gold as a good place to store cash. The higher the metals go, however, the more analysts are calling for a correction.

"Given the gains in recent sessions, particularly in gold and silver ... there is the risk of deeper corrections across the metals as long liquidation is seen due to the long Easter weekend," predicts James Moore, research analyst at FastMarkets. "We still expect dips to be viewed as buying opportunities, with gold and silver viewed favorably by investors seeking to hedge against inflation and debt jitters."

In the latest commitment of traders report, silver speculative short positions grew 12% from April 5th to April 12th, the latest data available, while long positions shrunk 5%. With a solid amount of traders betting on lower silver prices, the longer silver prices stay high the more traders have to buy back those short positions for a loss, which in turn, drives prices higher.

Gold saw speculative longs stay flat while short positions grew 8%.

George Gero, senior vice president at RBC Capital Markets, believes that silver's rally is not only short covering but also repositioning by traders ahead of options expiration next week. There are also "a lot of momentum traders after highs." Gold prices have also been subject to this rebalancing.

The medium term snag for gold and silver, however, comes in June when the Federal Reserve's quantitative easing program comes to an end. Next week the Fed will meet and no changes to interest rates are expected, but the market will be listening for hints on whether monetary policy will be tighter or loser in the future.

Steve Ayer, managing director and partner at HighTower's Strata Wealth Management, believes that the Fed will have no choice but to continue a lose money policy by either QE3 or by reinvesting its profits from QE2.

" We are not going to see liquidity go away anytime soon," argues Ayer despite calls from certain hawkish Fed presidents to raise interest rates to fight inflation. "Bernanke and the doves are certainly not" concerned about inflation and "they have more sway."

It is generally known that the Fed, like other central banks, is in a bind. Tighten too soon and risk cutting off growth, or keep pumping money into the system and create massive commodity inflation.

Ayer thinks if markets see a QE3, gold will hit $2,000-$2,500 later this year and silver will spike to $75-$80. If the Fed simply reinvests existing funds, gold could hit $1,750 - $1,800 and silver goes to $60. If loose money stops, it will be "extraordinarily painful for commodities as well as stocks"

Ayer prefers buying Market Vectors Gold Miners ( GDX), Market Vectors Junior Gold Miners ( GDXJ) and Global X Silver Miners ( SIL) despite the fact that the silver ETF is up only 6% for the year and the gold ETFs have rallied no more than 3%.

"Stocks are undervalued," says Ayer. "They could rally 50%-70% and not be overvalued with respect to their historic ratio of gold ... right now it is the most undervalued stock sector in the market ... as the sector comes more into vogue .... it won't really matter the trivial underperformance of one company versus another."

Gold mining stocks, a risky but potentially profitable way to buy gold, were trading mostly higher. Kinross Gold ( KGC) was losing 0.20% to $15.34 while Goldcorp ( GG) was up 0.98% at 55.47.

Other gold stocks, Agnico-Eagle ( AEM) and Eldorado Gold ( EGO) were trading at $68.05 and $18.04, respectively.


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-- Written by Alix Steel in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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