(Kitco News) - The sell-off that hit precious metals prices this week could continue to spill over to next week, market watchers said.

Index rebalancing occurs next week, as traders and funds that follow the composition of the various commodity indexes will need to adjust the weightings of the various markets to be in alignment. Analysts said some of the weakness in precious metals this week was likely investors selling ahead of this annual event.

“People are attributing part of break to that – doing some pre-emptive selling. You see it year-in, year-out. This year it hurts metals because they’ve rallied so much. (These investors) are looking for markets that are undervalued,” said Darin Newsom, senior analyst at Telvent DTN.

Friday, February gold futures prices on the Comex division of the New York Mercantile Exchange settled at $1,368.90 an ounce, down 3.7% on the week. March silver settled at $28.67 an ounce, down 7.3% on the week.

If selling continues next week, that support could be broken, with the next psychologically important target of $1,350 seen as important.

Newsom said support is also around $1,317, which is another key technical chart level. A break of that region could mean a retreat to $1,250. For silver, support is in the $23-$24 range.

He’s not sure gold prices have bottomed in the short term yet. Buying interest ran out near the highs set last month, and with the dollar rising, it left the metals in a vacuum. “For next week I’m not seeing anything to change that. It would take bearish economic news or the EU to have problems – that would entice safe-haven buying,” he said. 

Nesom said the dollar’s action will be something to watch for direction for all commodities. Recent dollar strength has pressured resources across the board. “I’m not a dollar bull yet, but it has room to go up. That will pressure commodities,” he said.

Ira Epstein, director of the Ira Epstein division of The Linn Group, said while longer-term gold remains strong, in the short-term trading view, a top is in place.

“Until prices get back over $1,437, rallies look to be selling opportunities…. Gold is now in a downtrend, but one that is already approaching it’s initially downside target. Can gold fall $100 or more from the $1,437 level? Why not? However, an all out collapse in price given periphery problems is in my opinion not in the cards,” Epstein said.

The periphery problems are the ones that lifted gold all last year- namely worries over European sovereign debt and gold’s increasing role as a reserve currency.

Epstein added regardless of his viewpoint, “nothing runs up without at some point taking a breather. Think of stairs. Each step has a landing pad. Prices often move up and down in stair like patterns.”

Next week brings more economic data to influence the markets. U.S. economic data this week was generally strong, which helped the dollar gain. Among some of the reports that are slated for release next week include the producer and consumer price index – inflation gauges – and retail sales.

Newsom said the government inflation reports are unlikely to show rising prices, especially considering crude oil prices didn’t move much during the reporting period. That’s unlikely to give gold a reason to rally.


By Debbie Carlson of Kitco News dcarlson@kitco.com

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