Gold Strong on Bernanke's Warning of Bank Failures

By: Mark_OByrne

Gold was up $7.10 to $965.80 per ounce in trading in New York yesterday and silver surged another 44 cents to $19.64 per ounce (more on silver below). In Asian and early European trading, gold and silver rose to new respective record and 27 year high levels but have fallen from record highs of $975.75 and $19.92.

Gold strengthened in British pounds and in euros to new record highs. The London AM Fix at 1030 GMT this morning was at $969.00, £488.88 and €637.58.

Gold continued its recent rally on record oil prices, the dollar hitting record lows  and growing fears of a U.S. recession yesterday. The GDP and initial jobless claim figures continued the recent trend of very poor economic data and may also have contributed to gold's strength yesterday.

Gold rose in the aftermath of Bernanke's worrying comments that there probably will be some bank failures. Understandably,  financial stocks in the U.S. weakened on the news. Bernanke acknowledged that stagflation was a possibility yesterday but said that "I don't anticipate stagflation. I don't think we are anywhere near the situation that prevailed in the 1970s." Never believe anything until it's been officially denied.

Worryingly markets are now pricing in a 75 basis point cut at the next FOMC meeting on 18 March. Today's sees the release of personal income and spending for January as well as the Chicago PMI and final Michigan sentiment surveys for February.

Our belief that the latest International Monetary gold proposal story was more spin than reality is seen in the fact that the IMF said on Thursday that no timetable has been set for the sale of a limited portion -- about 12.9 million ounces (403.3 tonnes) -- of the IMF's gold stocks of 103.4 million ounces. The news was not widely reported unlike the previous ‘news'. In a background paper, the IMF said if the gold was sold on the market, as opposed to off-market transactions, the sales would be phased over time to avoid market disruptions, as recommended by an independent panel.
Factsheet - Gold in the IMF : http://www.imf.org/external/np /exr/facts/gold.htm

Support and Resistance
Strong support in gold is now seen at $890 to $900. Short term support is now at $950 and below that at $930 and $915. The $1000 price level remains a short term price target and $1,200 is now a realistic possibility in the coming weeks.

Silver
Silver is trading at $19.64/70 at 1200GMT.
At the start of the year we predicted that silver would reach $20:
“ We remain bullish on silver and continue to believe it will outperform gold due to the extremely strong supply demand fundamentals. We believe silver will surpass $20 per ounce in 2008 and could reach as high as $25 per ounce.”

Despite surging prices the silver open interest fell another 5,128 contracts to 168,212 yesterday once again showing that this is not a speculative bubble rather a possible commercial signal failure where the huge and unprecedented concentrated short positions in silver are being forced to cover their shorts and buy back silver in significant volumes. We could see the commercial shorts forced to panic cover en masse creating a massive surge in the silver (and gold) price. This eventuality is looking increasingly likely, especially in the light of the very significant macroeconomic and systemic risks facing the U.S. and many western economies.

Silver has now surpassed the predicted high of most silver analysts in the world who have failed to realize the massive growing supply demand imbalance in silver and how the humongous and unprecedented short position in silver would lead to prices being propelled to levels that may shock even silver's more bullish enthusiasts. This happens in most bull markets but will be a sight to behold in silver in the coming years.

Only 3 analysts out of 21 predicted gold would surpass $19.50 this year. This continues a trend whereby most analysts have underestimated the fundamentals driving these bull markets in gold and silver and continue to do so. http://www.lbma.org.uk/publicat ions/forecast%202008/forecast20 08_silver.htm

Of all the precious metals and commodities we remain the most bullish on silver, next gold and then platinum and palladium.

PGMs
Platinum is trading at $2153/2163 (1200GMT).
Palladium surged and is trading at $560/566 per ounce (1200GMT). 

Both platinum and palladium are flat and appear to be taking a breather and consolidating prior to further likely price increases in the coming weeks.

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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