(Kitco News) - If the situation in Libya can be resolved next week and unrest does not spread, gold and silver prices will likely fall after rising recently on Middle East uncertainty.

However, if a peaceful end is not reached or if other countries see rioting, then precious metals prices will rise once more.

April contract gold futures on the Comex division of the New York Mercantile Exchange settled at $1,409.30 an ounce up 1.47% on the week. May silver settled at $32.898 an ounce, up 1.86% on the week.

The outcome of civil unrest in Libya will be the main event to affect the market, said Ira Epstein, director of the Ira Epstein division of The Linn Group. “The economic numbers don’t mean a thing in this environment,” he said.

If there is a peaceful resolution to the Libyan unrest, such as Gaddafi stepping down from power, gold prices could retreat, analysts said. The apprehension regarding the potential outcome for Libya was underscored by the relatively tight trading range for gold on Friday.

April gold futures posted an inside trading day on technical charts. That occurs when the current day’s price range is contained within the previous day’s price band. Such market behavior usually represents indecision on the part of traders.

The question that remains foremost in traders’ minds is what will happen to Libya’s oil fields. If oil can continue to flow, then “gold may have put in its best performance,” Epstein said.

However, if oil supplies are cut off any point, whether at the fields or at the ports for whatever reason, then the situation changes and gold prices – along with oil prices – will push higher.

Epstein noted even though Saudi Arabia said it can replace any Libyan oil, it will take 90 days before it production could resume. But oil supplies themselves are not an issue.

“We’ve totally forgotten that two weeks ago Cushing (a major oil trading hub in the U.S.) was overflowing with oil and the Canadian pipelines were opening, bringing more supply,” he said, adding that the fundamental news doesn’t matter at this point.

Michael Gross, broker and futures analyst with OptionSellers.com, said the precious metals markets have digested most of the turbulence at current price levels. If tensions continue to ease and remain contained, traders who bought metals on the beginning of the unrest will likely liquidate positions. That could mean weakness next week for prices.

“We don’t predict geo-political outcomes, but if the violence doesn’t spread in the near-term we could see profit-taking in gold,” Gross said.

Gold and silver prices have become overbought at current levels and have little to sustain them unless sparks fly again in the Mideast. Some analysts emphasized that leaders in countries like Morocco and Saudi Arabia are taking steps to appease their populace with new domestic programs and subsidies.

Seasonally, Epstein said both gold and silver are going into a weaker period. He noted that the market research firm Moore Research, which tracks price trends, noted in the last 15 years, gold prices from March 1-24 fell an average of $10 an ounce. Silver prices from the end of February to early April fell 13 out of the last 15 years.

If Gaddafi is marginalized and Libya’s oil fields continue to operate, he does not see gold prices retesting this week’s high of $1,418.80. Support for the market is at $1,350, he said. Eventually, though, Epstein said gold prices will ultimately take out the all-time high of $1,434.10 from December and could rise to $1,450, maybe $1,500 as concerns return about inflation.

Gross said support for April gold is seen first at $1,375 to $1,370, with secondary support at $1,350. May silver has support at $31.24, an area of previous highs.

Aside from the turmoil in the Mideast, other events are taking place. Marc Chandler, global head of currency strategy for Brown Brothers Harriman, said the Brazil’s central bank meets on Wednesday and could be forced to raise interest rates as they try to tame inflation there. If Brazil does raise rates, other emerging markets, especially in Asia could “demonstrate greater willingness to raise rates and tighten monetary conditions. The fact that China is also tightening monetary policy, or perhaps fairer, reducing accommodation, will encourage others in the region to continue to do so,” Chandler said.

European Central Bank will meet on Thursday. He said bank officials there have “sounded increasingly hawkish in recent weeks. That rhetoric is likely to translate into action,” he said.

Rising interest rates can pressure gold prices, especially if countries try to rein in inflation, analysts have said.

 

By Debbie Carlson of Kitco News dcarlson@kitco.com

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