Merrill: gold, silver figure to rise In 2012; ETFs end Thursday mixed

Gold and silver ended mixed Thursday, with the white metal finding its ties to industrial uses helping to lift it higher along with equities. Meanwhile, the yellow metal remained in a funk, caught by a backlash in technical sentiment and a likely end-of-year balancing of the books by fund managers.

The SPDR Gold ETF  closed down 0.4% while the iShares Silver ETF   rose 0.5%. Miners followed a similar pattern: The Market Vectors Gold Miners ETF  fell 1.3% and the Global X Silver managed to squeeze a 0.1% gain by session’s end.

In futures, gold for February delivery slid 0.6% to finish at $1,577.20 an ounce on the Comex. In the past four sessions, the price for the most active contract has lost almost $140. March silver rose 1.2% to $29.27 an ounce.

Gold has “failed to uphold its primary role as a safe haven asset,” wrote analysts at Sharps Pixley. But it’s maintaining close ties to the U.S. dollar, they pointed out. The PowerShares U.S. Dollar Index ETF  dropped 0.3% on Thursday.

UBS estimated that last week gold ETF holdings increased to an all-time high. Silver ETFs also saw an increase, the report added. But retail sales data revealed that gold and silver jewelry in China saw a “considerable decline” in November. “Given this dip in demand,  and the large inflows of physical metal so far this year, we suspect China’s imports from Hong Kong in November and December will prove to be considerably lower,” wrote Edel Tully, the firm’s precious metals strategist.

She added: “We do not, however, think that the recent softness in physical demand reflects a fundamental change in Chinese sentiment towards gold.”

Traders are “placing a lot of importance on physical buyers to step in and put a floor under gold,” Tully noted. The uptick in physical demand by ETFs and others recently “should somewhat calm investors’ nerves,” she pointed out.

In a look ahead to a new year, commodities analysts at Merrill Lynch today detailed several different possible scenarios across world markets that could wind-up impacting precious metals. They explained that the current correction “is not unusual during periods of liquidity contractions (in financial markets) as investors liquidate positions to cover losses on other markets.” The piece also points to increased margin requirements on exchanges as hampering flows.

Merrill continued: “Despite these price declines (late in 2011), we note that assets under management at vehicles like physically backed exchange-traded funds have held up reasonably well … ETFs have at stages seen inflows as prices collapsed. This suggests that the recent correction does not indicate a broad-based reassessment of gold’s fundamentals.”

The firm’s research staff also sees an increased likelihood that the U.S. or Europe, maybe both, will need to stage “large-scale monetary easing” at some point next year. Such growth stimulus initiatives figure to support further gains in gold, Merrill predicted, adding that they now believe “gold prices could briefly break into a $2,000-$2,500 an ounce range over the next 12 months.”

But looking at a worst-case scenario, Merrill warns that a euro-zone breakup would be “initially negative for gold.” Risks would skyrocket, mimicking conditions following the collapse of Lehman Bros. and leading to beneficial safe-haven buying of gold. “However, as during Lehman’s collapse, we expect gold prices in U.S. dollars to come under pressure as liquidity dries up from the interbank lending market,” the report notes.

In the case of silver, Merrill estimates that silver prices currently hold a fair market valuation of around $30 an ounce. The analysts say that 2011′s peak prices around $50 an ounce were heavily driven by speculators who’ve since exited. They also make the point that a slowdown in economic growth is usually not “conducive” to outperformance by silver.

“Acknowledging continued interest in the metal, we believe there is some upside in 2012, when prices should average $34 an ounce, followed by $37 an ounce in 2013,” Merrill predicted. - barrons.com

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Posted by Silver Guru on Dec 16 2011. Filed under Silver prices, Silver stocks. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry