Gold Price Drops, Silver Follows

GOLD PRICE NEWS – The gold price declined Friday morning, sinking $11.00 to $1,638.50 per ounce.  Gold prices retreated on the back of a stronger U.S. dollar and weakness in the broader stock and commodity markets.  The U.S. dollar climbed against the euro and commodity currencies such as the Canadian and Australian dollars.  S&P 500 stock futures fell 9.00 to 1282.70, falling after a weaker than expected fourth quarter earnings report from JP Morgan Chase.

Gold prices posted modest gains of $7.28, or 0.4%, yesterday to finish at $1,649.60 per ounce.  The price of gold was supported by weakness in the U.S. dollar, as well as worse than expected reports on U.S. retail sales and weekly jobless claims.  Gold, denominated in euros, held firm after the European Central Bank (ECB) and Bank of England (BOE) left their respective benchmark interest rates at all-time low levels following their monthly monetary policy meetings.

Silver sank alongside the gold price, dropping 1.8% to $29.75 this morning after posting a modest $0.20 gain yesterday.  Coming into today’s trading session, the spot price of silver has advanced four consecutive days and is on pace for its best weekly gain since late October.  Despite today’s weakness, the iShares Silver Trust (SLV), a proxy for the silver price and the sector’s largest ETF, has climbed 5.1% this week.

One of the top performing gold stocks yesterday was Yamana Gold (AUY), which surged 3.5% to $15.80 per share after announcing that 2011 gold production increased 5.0% to 1.1 million ounces.  Furthermore, the Canadian-based gold miner updated its three-year forecast, which included production growth of 59.0% between 2011 and 2014.  Other notable advancers yesterday included Goldcorp (GG) and Randgold Resources (GOLD), which climbed 1.7% and 1.8%, respectively.  Gold shares fell early Friday on the back of weak gold prices.

While the gold price has faced many headwinds in recent months in the form of better than expected U.S. economic data, such was not the case on Thursday.  Retail sales increased at the slowest pace in seven months, by 0.1%, compared to the 0.3% consensus estimate among economists.  In addition, weekly jobless claims rose to 399,000, well above the 375,000 projected level.  The two disappointing data points suggested that the U.S. economy may not be rebounding as quickly as previously anticipated.  Moreover, the reports are likely to provide the Federal Reserve with further evidence to maintain its highly dovish stance on monetary policy.

Across the Atlantic, the gold price was the beneficiary of ongoing accommodative monetary policies from two other of the world’s largest central banks.  The Bank of England held its main interest rate at a record low of 1.0% and cautioned that “We should be realistic about the risks; the uncertainty in the euro area continues to have a chilling effect on the UK as well as elsewhere.”  Following the announcement, several analysts contended that the BOE will expand its £275 billion quantitative easing program by £50 billion at next month’s meeting.

As for the European Central Bank, it kept its benchmark interest rate at a record low of 1.0% following two consecutive reductions.  ECB President Mario Draghi subsequently stated at his post-meeting press conference that “The monetary stance is and will remain accommodative.  Uncertainty is very high. We will monitor all developments and stand ready to act.”

In a recent edition of Dow Theory Letters, Richard Russell discussed the case for higher gold prices in light of the ongoing collection of accommodative monetary policies across the globe.  Russell – a long-time gold bull and author of the world’s longest-running daily investment letter – wrote that “For a decade I have been urging my subscribers to move into gold — either physical bullion or otherwise. Now I am at it again PLEASE MOVE INTO GOLD…This is a time when almost every central bank in the world is grinding out paper currency, grinding it out by the car-load. This is a time when people are searching for safety…Gold alone is the world’s only completely safe currency.”