Eurozone Debt Woes a “Mixed Bag” for Silver Prices

By Melissa Pistilli—Exclusive to Silver Investing News

The European fiscal crisis has once again become the focal point of the precious metals markets this week; however, instead of surging upward on safe haven buying, both gold and silver have lost ground gained in early September.

Last week, gold scored another price record reaching $1,923.70 an ounce with silver over $43 an ounce. Early this week, the price of gold fell briefly below $1,800 an ounce while silver dipped below $40 an ounce as investors sold precious metals presumably to cover losses in the equity markets.

Over the weekend, finance ministers from the G7 nations met to forge an alliance in tackling the global economic slowdown; however, any signs of cooperation amongst world leaders were overshadowed by fears that Greece is heading toward an inevitable default on its debt. On Monday, the European nation admitted it only had enough cash to last a few more weeks; reports of a 98 percent chance of default in the next five years followed.

The crisis is spreading through the Eurozone with France also making headlines this week after Moody’s lowered the credit ratings for two of the nation’s largest banks, Societe Generale SA and Credit Agricole SA. No surprise, given that “French lenders top the list of Greek creditors with $56.7 billion in exposure to private and public debt,” pointed out Bloomberg reporters Debarati Roy and Nicholas Larkin. 

While the ongoing debt crisis in Europe has played a major role this year in gold’s dramatic gains — and silver’s to a certain extent — this week precious metals haven been subjected to the same sharp sell-offs seen in equities across the globe. European markets were especially hard hit, falling to a two-year low.

Later in the week, equity markets stabilized on Germany and France’s growing commitment to keep Greece, and essentially the eurozone, from falling off a cliff. The hint of optimism has further dampened the flight-to-quality appeal of gold and silver. Gold fell below that mark again in early trading Thursday to as low as $1777.90 an ounce, while silver dipped down to $39.74 an ounce.

Tom Pawlicki, MF Global precious metals analyst, wouldn’t be surprised to see gold fall back toward $1,750 an ounce in the short term. “A decline may be anything but a straight line fall, as volatility is likely to remain,” he added. Quantative Commodity Research consultant Peter Fertig points out that precious metals also took a hit when the stock markets fell in 2008, and he anticipates further downward pressure in the short term as well.

“People always assume that gold does well in times of crisis, but that is not necessarily the case,” said Standard Chartered analyst Dan Smith in a recent Reuters report. “Gold is held as part of a wider portfolio of assets, so when you see blanket selling of equities, then gold will come down at the same time. Having said that, of course, it has tended to do well on worries about Europe and currency strength, but the wider picture needs to be taken into account, so that is why gold is struggling at these higher levels.”

Jamie Greenough of Global Securities reports that some traders believe Greece-supportive rhetoric out of Germany may be “undermin[ing] safe haven interest in gold, while others think that a lack of a run away crisis in the Eurozone is simply prompting long liquidation of gold positions.” Greenough suggests that it may also be the case that the gold market is reacting to concerns “about deflationary slowing in the global economy.”

Losses in both gold and silver are being tempered by those bullish bargain hunters looking to “buy the dip.”

Economic woes hurting silver’s industrial side

Of course, where gold goes silver often follows. Like gold, silver has also moved in step with the equity markets this week facing downward pressure despite the flight to quality vibe seen in the US Treasuries and the dollar. Growing fears of a double dip recession may be weakening silver prices. On Thursday, US weekly jobless claims rose for the second straight week and US industrial production figures posted a disappointing rise of only 0.2 percent for August.

“The industrial demand portion of global silver usage is also a key factor in understanding how the market works,” says Mike Getlin, executive vice-president of Merit Financial. “While a failing global economy can be extremely positive for long term gold prices, it’s much more of a mixed bag for silver … when the global economy stalls, it can hurt silver demand significantly.”

Prices for commodities such as crude oil and copper have also been hit by fears that demand may suffer due to the ongoing debt crisis in Europe and signs of economic slowdown in Asia. MF Global senior commodity analyst, Edward Meir, says downward pressure on commodities is expected to continue as long as a solution to Europe’s financial crisis seems out of reach, reports Kitco’s Allen Sykora. “Until a more comprehensive plan emerges that shows the markets that Greece will indeed be supported unequivocally, investors will likely err on the side of caution, and assume it will not,” said Meir. “This will likely continue to pressure a number of markets, primarily equity and European bonds, but the negativity will feed into commodity complexes as well.”

With the majority of demand for silver coming from the industrial sector it’s hard for the white metal not to get caught up in concerns of slowing global economic growth. Some analysts are warning that we are likely to see this downward trend in silver prices continuing, at least in the short term, until the markets are convinced of an improvement in the global macro economic picture.

Merit Financial’s Mike Getlin points to the light at the end of the tunnel: “Don’t forget that just because the west is hurting, doesn’t mean China and India aren’t buying silver at a record pace. One other important consideration is that silver used in industrial applications tends to be destroyed. Unlike gold, which is often recycled and re-used, the hundreds of millions silver ounces used in industry each year are typically gone forever. On the other hand, silver is also seen as a form of currency in the same way gold is used. This is a key factor for the long term picture. As gold becomes more and more expensive, individual investors are turning to silver in greater numbers as a storage for wealth and a tool for barter.”

For a view on what to expect from silver prices for the rest of 2011, read Silver Investing News reporter Michael Montgomery’s Q4 Silver Price Outlook.