Market sell-off testing gold bulls

Another tough day for precious metals yesterday, with gold, silver, platinum and palladium hit hard by hedge funds’ flight from equities and commodities. Concerns that Greece is on the verge of being forced out of the euro – combined with a surge in 10-year Spanish bonds back above the 6% “danger” mark – continues to drive traders into the “warm” embrace of US Treasuries.

The front-month Comex gold contract settled at $1,604 – its lowest settlement for four months – with a further decline into the $1,580s during Asian trading this morning. The price seems to have stabilised somewhat over the last few hours, and there are surely enough willing sovereign buyers out there to stem the bleeding. The decline in silver was even more pronounced of course (at over 2%). Buying support for silver should exist around $28.50.

The largest gold producers are fairing even worse at the moment, with the HUI Index of leading gold shares falling below 400, and seemingly at risk of the kind of panic selling we saw in late 2008. The HUI/Gold Ratio – the price of one share of the HUI divided by the gold price – is now down to similar levels seen in late ’08, and at roughly the same levels seen during the late 1990s/early 2000s. If we’re experiencing a bull market in precious metals at the moment, it sure doesn’t look like it as judged by the HUI’s price action since the end of 2010. The flipside of this is that there are great bargains to be had among mining shares – provided you have a strong stomach – as discussed by Dominic Frisby and Brent Cook in a recent GoldMoney podcast on how to play the gold mining sector.

Where we go from here in terms of precious metals, the dollar and the euro is as ever hard to predict in the short-term. But worth noting are the fairly muted gains in the dollar over the last day – despite the “sell Europe” meme dominating. Is 82.00 a hard-ceiling for the USDX?
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