HardAssetsInvestor

Written by Sumit Roy  |

October 18, 2011

Precious Metals Monitor: Gold, Silver Retest Support; Offer Buying Window Ahead of Key EU Summit

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How will a critical weekend meeting in Europe impact precious metals prices?

This past week was a fairly uneventful one for precious metals, as the sector grinded up and down within a fairly narrow range. As expected, the sector is in the process of bottoming out after the steep drop in September.

Price action may continue to stay relatively muted despite an upcoming critical phase of the eurozone debt crisis. G-20 nations have urged eurozone policymakers to come up with a comprehensive solution to the region’s debt crisis by the EU summit this Sunday.

But at the same time, German Chancellor Angela Merkel warned that the summit may not result in a silver bullet that solves the crisis in one shot.

The uncertainty surrounding this key meeting of EU policymakers may have caused wild swings in precious metals only weeks ago, but today we find ourselves in a much different environment.

That’s because, as we’ve written in the past, gold (and by association, silver) have lost their safe-haven roles for the time being. With traders no longer treating the metals as vehicles to play short-term developments in the eurozone crisis, they naturally no longer respond to those developments.

Indeed, selling by those short-term traders is what caused the significant sell-off in September. It is longer-term investors and consumers who are stepping in to buy at these prices. And they are less concerned with the short-term news flow associated with Europe.

Nevertheless, the evolution of the crisis in Europe will be closely watched by all. It will certainly have an impact on financial markets as a whole. In particular, many are hoping to see a restructuring of Greece’s debt; an expansion of the lending capacity of the European Financial Stability Facility (bailout fund); and a framework for recapitalizing European banks.

Given that precious metals are now fluctuating in the same direction as other risk assets, including other commodities and stocks, a constructive outcome to Sunday’s summit may actually spur prices higher. Conversely, if policymakers fail to deliver anything substantive, precious metals may suffer along with the broader financial markets.

Because the stakes are so high and because top leaders have already indicated that decisive action will be taken, we believe that Europe may end up taking action that appeases markets. That bodes well for a continued recovery in gold, silver, platinum and palladium.

For gold and silver, prices near $1600/oz and $30/oz, respectively, may be good points to accumulate positions for the long term.

Meanwhile, we continue to see palladium as offering the most upside in the medium term, as traders refocus on strong global growth fundamentals.

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