Gold, Silver Prices Extend Losses

NEW YORK ( TheStreet ) -- Gold and silver prices extended their painful selloff as the metals were unable to find support and traders dumped positions.

Gold for June delivery lost $25.10 to settle off its session lows at $1,515.30 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded in a broad range between $1,543.50 and $1,505.50 Wednesday. The spot gold price was tanking $19, according to Kitco's gold index. Gold prices are still a long way off from $1,439, the spot price before April's monster rally.

Silver prices lost $3.19 to close $39.38, almost wiping out April's gains and off 26% from recent highs. The U.S. dollar index was losing 0.15% to $73.01 but had reversed steeper losses after the services sector contracted in April.

A volatile U.S. dollar and news of an official $116 billion bailout of Portugal weren't enough to buoy gold and silver. Both metals tried to find support levels in early trading but momentum selling dragged them lower.

Silver has led the charge down by oversold conditions and three margin hikes by the CME as the futures market tried to handle the volatility.

"The reason why the exchanges and clearing houses are raising their rates is because of these violent moves we have been having in silver, anywhere from 5-10% moves on a daily overnight basis," says Anthony Neglia, president of Tower Trading, who says the hikes are not affecting his silver positions.

Neglia likes silver above $42 and still believes with metal will hit $50, but that below $40 he would get bearish. He said, "$38 is your next level because that is where this whole move started from." There is some speculation that such a steep slide towards that level could ignite some tentative bargain hunting.

Gold, on the other hand, is a deeper and more liquid market, which makes it able to absorb volatility better, down only 4% from its record intra-day high of $1,577 an ounce. Mihir Dange, trader at Arbitrage, thinks that margin hikes won't hit the gold market.

Gold's range is big and high between $1,500 and $1,577 an ounce. Dange is still bullish on the metal thinking it can hit $1,600 in 2011.

"If you're playing the macro picture, you can buy dips and hold," he said. Dange is selling into strength to book profits.

Dange says if gold holds steady below $1,520 then it could sink to $1,500 and around $1,515-ish he would be a long-term buyer. If gold breaches $1,477 an ounce, Dange says he would get short.

There are two events this week which will provide direction for the precious metals: the European Central Bank meeting Thursday and Friday's U.S. jobs number. The ECB raised rates at its last meeting in April by 25 basis points and it is unlikely that it will do so again at the next meeting. Some experts are looking at July for the next hike.

Neglia, however, seems pretty convinced the ECB will raise rates to fight inflation that is now at 2.7%. He thinks traders are looking to "flatten out" their silver positions ahead of the move, which could have contributed to silver's recent dramatic selloff.

Dange thinks that Friday's jobs number will be more significant for the gold price arguing that even if the ECB raises rates the Federal Reserve has made it clear it won't until at least the fall.

The U.S. unemployment rate is expected to rise to 8.9%, according to, while the private sector is expected to add 200,000 jobs. The number of people filing for unemployment benefits for the first time has been rising in recent weeks over the pivotal 400,000 level which could put a crimp in a better jobs picture. Initial claims are a leading indicator while the jobs number is a lagging indicator.

If the number beats expectations, gold and silver could sell off as the Fed might be prompted to reduce its balance sheet or talk more seriously about raising rates. If the jobs picture remains weak, the metals can be assured of free money for at least the next five months, and the big bulls will even talk of another round of quantitative easing.

In the meantime, gold and silver will continue the dance of rerating their ratio which has fallen as low as 32 last week and is now around 38, which means it takes 38 ounces of silver to buy one ounce of gold. The lower the ratio, the higher the silver price and vice versa.

The 10-year average for the gold/silver ratio is 60:1 which would imply much lower silver prices and gold as the outperformer.

One technical factor which could support this trend, although 60:1 is a pretty bearish outlook, is the futures market. The gold market is in contango, where further out contracts trade higher than the spot month. Silver is in backwardation, which means traders, who are stressed about a supply crunch, are moving the spot month higher than the contract furthest out. Contango is the norm in the futures market, and if silver reverts prices could head lower.

The physical market is signaling something similar. Adrian Ash, head of research at, says that "since the close of London trade last week, wholesale silver is down 10.5% but gold is up at new record highs," a trend that continued today. "Gold up, silver down is a very rare event -- less than 14% of all trading days since 1968." Ash also points out that although gold prices in the U.S. plummeted in mid-day, Wednesday's "PM fix in London set a new all-time high for the global benchmark at $1,541."

According to the Wall Street Journal, legendary investor George Soros' fund has been selling gold and silver, but the amount of the supposed sales has not been confirmed. John Paulson's firm reportedly still holds more than 30 million shares of the SPDR Gold Shares ( GLD).

Gold mining stocks have yet to see the benefit of higher gold prices. Out of the 12 stocks in the CBOE Gold Index ( GOX), down almost 4% year to date, only three have positive returns for the year: Harmony Gold ( HMY), Iamgold ( IAG) and Goldcorp ( GG), which reports earnings ater the close Wednesday.

Goldcorp was 0.59% lower Wednesday at $50.88, recovering from a steeper selloff while other gold stocks Kinross Gold ( KGC), Agnico-Eagle ( AEM) and Eldorado Gold ( EGO) were trading mixed at $15.66, $64.51 and $16.66 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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