Thursday, February 17, 2011

Gold Tops 5-Week High, Silver At 31-Year High

Comex gold futures ended Thursday at a fresh five-week high on technical trading and muted U.S. economic data, while increased hedging by silver producers pushed silver prices to fresh 31-year highs.

The most actively traded contract, for April delivery, settled up 0.7%, or $10, at $1,385.10 a troy ounce on the Comex division of the New York Mercantile Exchange.

The thinly traded February-delivery contract settled up 0.7%, or $10, at $1,384.70 a troy ounce.

As gold futures drifted higher throughout the day, the contract rose above key technical levels that triggered buy orders.

"When a certain price is triggered you see a lot of buyers come in," said Larry Young, president of Covenant Trading LLC. Gold saw a technical break out above $1,382.50, he added.

The precious metal also benefited from modest safe-haven buying on weaker-than-expected U.S. economic data.

The number of U.S. workers filing new claims for unemployment benefits increased by 25,000 to 410,000 in the week ended Feb. 12, more than the 17,000 increase forecast by economists.

Gold futures ticked higher on the report, though market reaction was muted.

"The numbers aren't that far off the mark to cause any excess movement in the markets," said Frank Lesh, broker and futures analyst with FuturePath Trading.

The labor market's slow recovery has been a boon for gold prices, as the Federal Reserve's dual mandate keeps the bank from raising interest rates and removing other aspects of the monetary stimulus program. With interest rates remaining low, gold maintains its competitiveness with interest-bearing assets such as bonds.

Gold also drew support from slightly higher U.S. inflation data for January. Consumer prices inched up 0.4% in the month, compared with an expected 0.3% increase. But underlying inflation, which excludes volatile food and energy prices and is considered a better measure of price trends by the Federal Reserve, rose by 0.2%.

The data were positive for gold, which is considered a hedge against inflation and a store of value. Market participants, however, pointed out that the pace of inflation in the U.S. continues to lag other countries amid a slow economic recovery.

"There might be a fear of higher rates out there in the market, but the Fed told us that a little bit of inflation is good--it shows economic activity," Lesh said.

Market participants also noted some modest safe-harbor gold purchases linked to the simmering political tensions in the Middle East. Gold traders kept a wary eye on conflicting reports about Iran's plans to send two warships through the Suez Canal, which first surfaced Wednesday. While no Iranian vessels are scheduled to pass the shipping thoroughfare, Israel characterized the plans as a "provocation."

Meanwhile, media reports about pro-democracy protesters' clashes with armed forces in Bahrain, Libya, Yemen and Iran added a small safe-haven "premium" to gold prices, Covenant Trading's Young said.

Silver pushed to fresh 31-year highs as an uptick in producer hedging tightened physical supplies of the metal and boosted prices.

Silver for March delivery, the most actively traded contract, settled up 3.1%, or 94.1 cents, at $31.570 a troy ounce on the Comex division of the New York Mercantile Exchange.

Silver miners have been expanding their hedging programs since the start of the year. Such programs see producers lock in today's prices for future production to protect against potential price declines by entering forward-sales contracts. Banks that execute these forward sales borrow silver from the spot, or immediate delivery, market, thereby temporarily crimping physical supply.

"Given silver is at prices we haven't seen since the 1980s, it is very attractive for some people to hedge that," said David Jollie, precious metals analyst at Mitsui Global Precious Metals.

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