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METALS OUTLOOK: Nervousness Regarding Global Economy To Support Gold Next Week

(Kitco News) - Gold prices will continue to find strength next week as the debt-ceiling talks in the U.S. drag on and investors fret about the chances for default for some European economies.

If an agreement is reached on lifting the U.S. debt ceiling, prices could pull back, but buying interest under the market will limit the downside for gold prices, market watchers said.

These concerns, plus thoughts that the U.S. Federal Reserve has left the door open to another potential round of fiscal stimulus if the U.S. economy falters, pushed gold prices to record levels this week.

The August contract for gold futures at the Comex division of the New York Mercantile Exchange settled at $1,590.10 an ounce on Friday, up 3.15% on the week, and just shy of this week’s record nominal price of $1,594.90. September silver futures gained 6.97%, settling at $39.091 an ounce.

In the Kitco News Gold Survey, out of 34 participants, 22 responded this week. Of those 22 participants, 15 see prices up, while three see prices down and four see prices sideways or unchanged. Market participants include bullion dealers, investment banks, futures traders and technical chart analysts.

Kevin Grady, gold trader on Comex floor with MF Global, said he’s very bullish gold, given all the fundamental news that is supporting the market.

“The debt crisis in Europe is very serious,” he said.

The negotiations that are going on in Washington to lift the ceiling on the U.S. debt, which stands now at $14.3 trillion, are making some investors turn to gold as a safe haven. Ratings agencies Moody’s and Standard & Poor’s have warned downgrades of U.S. debt will result if the ceiling is not raised. While most market watchers expect a resolution will occur before the U.S. runs out of money, the fact the talks are dragging on is significant.

“In 2008, after Lehman Brothers failure, people rushed to Treasurys because they knew the U.S. wouldn’t default. But with the talks dragging on, people are thinking ‘maybe those are not so secure.’ Even if they do lift the ceiling, that’s just going to bring more inflation, which is bullish for gold,” Grady said.

There are some market watchers who believe after the strong rally in gold, the metal could trade in a range or even pull back in the next week or so, even as they have long-term bullish viewpoints.

“We are bullish for gold and target the $1,610 area. However, given extreme sentiment readings, we are cautious of a near-term top,” said Barclays Capital technical analysts.

Ken Morrison, editor and founder of online newsletter Morrison on the Markets, said while the debt ceiling talks are going on gold is unlikely to sell off. However, he said the tendency is for gold to pull back once it has made its highs.

“In the past year alone, gold has had a sharp, meaningful correction within five days after reaching a new high. History will repeat for the sixth time in the past year,” Morrison said.

Grady said resistance for the August gold futures contract is at $1,600, then at the usual round-number benchmarks. With gold trading at record highs, there are few levels for technical analyst to point to. Support, he said, is at $1,576 and $1,547. He noted when gold prices have retreated, there is strong buying support at lower levels, which limits downside losses.

Silver broke out of its recent trading range as gold rallied this week. Barclays noted that silver topped near $39.50. A move “above there would signal gains toward our next target at $41,” they said.

Market watchers are still a bit skeptical of silver’s strength in the short-term as the damage done during the sharp rally and drop during late spring is still being healed.

Anne-Laure Tremblay, metals analyst at BNP Paribas, echoes what others have said about the metal. “In our view, the silver price may continue to be range-bound during the summer months alongside lesser interest in gold and a soft patch in the economy. Silver could outperform gold once more towards the end of summer and we would expect the gold/silver ratio to start declining once more as a result, although not returning to April’s record lows of 31.7,” she said.

The ratio is currently around 41.5. BNP Paribas is keeping its silver forecasts first calculated in June of an average price of $38.30 for the third quarter, $42.55 for the fourth and $45.30 for the first quarter of 2012.