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NEW YORK ( TheStreet ) -- Gold and silver prices plunged Wednesday as a stronger U.S. dollar and profit taking weighed on the metals. Gold for June delivery lost $15.50 to settle at $1,501.40 at the Comex division of the New York Mercantile Exchange. The gold price Wednesday has traded as high as $1,526.80 and as low as $1,495.40. The spot gold price was down $14.70, according to Kitco's gold index. Silver prices dropped almost $3 to close at $35.51 an ounce.
"The reason is because food prices in particular represent a much greater share of household expenditures in developing countries compared to developed countries (food prices are 13% of the U.S. consumer price index)." Crescenzi says food makes up 30% of household expenditures in China. Developing economies spend less on discretionary items because their per capita spending is lower, leaving the majority of the money to be spent on food. The faster and higher food prices rise, the faster workers will push for higher wages, causing more and more inflation. High inflation readings that outpace interest rates are typically good for gold and silver as a safe haven play as your dollar in the bank is worth less than the hard assets. It should be noted that with the amount of speculation that was in the silver market, which led the 27% correction last week, silver could be looked at as a risk asset as well as a safe haven. There is speculative money in gold, as well, but less than silver. Although the readings were ignored today in favor of a broad selloff, gold bulls will point to high inflation as reason to believe that the fundamental story in gold and silver hasn't changed. The more conservative will point to the fact that today's selloff confirms that there were more speculative traders in the market that needed to be shaken out. Jeb Handwerger, editor of GoldStockTrades.com, says he isn't buying any gold and silver now but still expects gold to hit $1,600, which was his target when the Middle East-North Africa political turmoil erupted in the first quarter. "Right now we've had a three and a half month rally .... And I would not be overly aggressive at this point." Handwerger thinks silver's recent correction in particular was healthy as the aggressive margin increases by the CME shook a lot of speculation out of the market. "We're looking in the low $30's for support levels ... we expect that silver would exceed our support level at $35, so we're looking to add to positions below $35." Waverly Advisors' technical analysis warned of complacency emerging in the commodities market, including gold and silver, meaning investors might be ignoring any danger signs and called for another attempt at making lows, "the strength and conviction of that move will tell us a lot about the character of the market."
There has also been chatter that European central banks might look to sell some of their gold holdings as they try to get their financial houses in order and avoid high interest payments in the debt market. According to the World Gold Council's recent Gold Investment Digest for the first-quarter of 2011, Portugal has 382.5 tons, Greece has 111.5 and Ireland has around 6 tons of gold in their reserves. Under the European Central Bank agreement, participating countries can sell up to 400 tons a year. Sales from December to February totaled only 0.2 tons. This demonstrates "a continued lack of interest in gold sales," said the report. "No matter how much money Athens now needs, Eurozone central banks won't sell any gold to help," says Adrian Ash, head of research at BullionVault.com. "Sovereign gold reserves are the ultimate back-stop. Selling even one ounce would put this crisis on a par with WWII." Kevin Mahn, Chief Investment Officer of Hennion & Walsh, which overseas $2 billion, also doesn't think central banks will dump gold and silver. Mahn says that 5%-7%, or as low as 3%, of a client's portfolio is allocated to metals but sees much more upside in copper and aluminium than silver and gold. "Investors should be opening their eyes to a wide" variety of metals, Mahn argues. "Gold and silver are tough," and both, he thinks, make attractive positions in a portfolio but he isn't expecting any more dramatic run-ups and is reluctant to call a bottom. Gold mining stocks were falling hard. Yamana Gold ( AUY) was down 0.76% to $11.80 while Harmony Gold ( HMY) was losing 3.12% at $13.37, despite an upgrade. Other gold stocks, New Gold ( NGD) and Gold Fields ( GFI) were trading at $9.43 and $15.43, respectively.
-- Written by Alix Steel in New York. >To contact the writer of this article, click here: Alix Steel. >To follow the writer on Twitter, go to http://twitter.com/adsteel.