Higher Gold Prices Seen For Next Week As Iran Tensions Lend Support

(Kitco News) - Higher gold prices are possible next week as tensions with Iran continue to escalate, market watchers said.

Prices were lower on Friday, but up on the week. The most-active April gold contract on the Comex division of the New York Mercantile Exchange settled at $1,776.40 an ounce, up 2.9% on the week. March silver settled at $35.338 an ounce, up 6.4% on the week.

In the Kitco News Gold Survey, out of 32 participants, 24 responded this week. Of those 24 participants, 19 see prices up, while three see prices down, and two are neutral on prices. Market participants include bullion dealers, investment banks, futures traders, money managers and technical chart analysts.

Gold and crude oil prices rose this week, supported by concerns that heightened tensions between the West and Iran may get out of hand, although profit taking ahead of the weekend weighed on gold. On Friday, Iran’s United Nations’ ambassador said Iran wants to talk further with the International Atomic Energy Agency, although a Western counterpart called negotiations this week regarding the country’s nuclear activities, “very long and fruitless,” according to Reuters.

All of this is supportive for gold prices, and it may prompt people to buy the yellow metal as an inflation hedge as worries that the current high oil prices will last into the summer, said Bart Melek, vice president and director, head of commodity strategy, rates and foreign exchange research and TD Securities.

“The risk of war, the western world sanctions on Iran and the Iranian sanctions on their European consumers will very likely propel oil higher, which is also a good story for gold,” Melek said.

Ralph Preston, senior market analyst at Heritage West Financial, said he’s watching the situation with Iran, along with everyone else. The EU and U.S. have embargoes on Iranian oil, but still other countries are buying from Iran. Paradoxically, the higher oil prices might be offsetting the ban, limiting the pain Tehran may be feeling.

But Preston said a real test might come if the Belgium-based SWIFT actually blocks Iranian banks from using its network to send money. On Feb. 17, Reuters reported that the Society for Worldwide Interbank Financial Telecommunication, which allows banks to move money globally, said that it’s ready to keep Iranian banks from using its system, reacting to international pressure. SWIFT has never blocked a country before. “That could really be the key,” Preston said.

Arnett Waters, chairman of A.L. Waters Capital, said in addition to the Iranian situation, several factors are lifting gold: bullish technical chart factors, higher momentum and expectations for further quantitative easing as Europe’s economy continues to falter and China’s economy slows. Crude oil will be a factor, too. “We expect to see gold, to some extent, follow oil’s direction in the coming weeks,” he said.

Looking at technical charts, Preston said the April gold futures contract is showing a wide “reverse head-and-shoulders” pattern on daily technical charts could be a bullish sign. He points to the Dec. 2 high of $1,769.70 for the left shoulder, the Dec. 29 low of $1,526.20 for the head and the Feb. 3 high of $1,765.90 as the right shoulder.

“I’m really not on board with the rally unless we close above the $1,808-$1,810 area. If that happens, we can be on a path to challenge the highs around $1,925,” Preston said, noting that the $1,808-$1,810 area represents a zone of resistance for gold.

Support is around $1,750. “If we pull back and hold that level, it will confirm that the market wants to run higher,” Preston said.

A close under $1,740 would have him reconsider the recent strength in gold, he added.

SOME LIMITS TO GOLD’S RISE

James Steel analyst, HSBC Securities, said gold has a generally bullish background, but he warns of two situations to mind. “We suggest two factors that may curb – but not reverse – the rally. Higher prices may dissuade emerging-market nations from purchasing jewelry and may also stimulate the scrap market. This combination could free up substantial amounts of bullion that would have to be absorbed by the investment market, if prices did not fall,” he said.

Edel Tully, UBS analyst said that scrap sales have risen by a marginal degree, but she is not concerned about the supply factor. Instead, she and other market watchers point out that the recent rally in gold has not come from the physical side. While she believes gold prices at $1,800 are justified, she is “hesitant” with her enthusiasm regarding this recent rally because it seems one-sided.

SILVER

Silver rose strongly this week and outperformed gold. Support for silver and for the platinum group metals, comes in part to hopes of the U.S. economy can stay on its moderate growth path.

Tully said the recent gains in silver have helped the gold:silver ratio to budge under the 51 area, to 50.41 as of Thursday, the lowest since early November. She said the stout rally silver had on Thursday was in part because the metal rose above its 200-day moving average, triggering resting buy orders.

“Interestingly, while our client flows were generally dominated by sellers, the market barely flinched and prices continued its climb higher. Such resilience could suggest that investors are starting to return to the market. With positive sentiment in gold continuing to grow, it would not be a surprise if some of that optimism is spilling over into silver. But we think it’s too early to make that conclusion just yet,” she said.

Barclays Capital technical analysts are also positive on silver, looking for it to move to the $35.70 area next week, with the gold:silver ratio falling to the 49.40 area.

Yet some analysts are tempering their short-term outlook for silver, noting that the rise in crude oil prices could limit the gains in the industrial precious metals.

“While rising oil prices and geopolitical risk may help support gold, the implications of rising oil prices on U.S. economic activity is worth watching closely for the silver and PGM outlook since silver is sensitive to trends in U.S. manufacturing sector activity and car sales affects PGM demand,” said Michael Lewis, analyst at Deutsche Bank.

Source; http://www.kitco.com/reports/KitcoNews20120224DeC_outlook.html