Gold and silver prices are falling on Thursday, breaking support at significant technical-chart levels, pressured by asset allocation and some concerns of further interest rate tightening in China.

Stronger U.S. economic data is in turn lifting the dollar and weighing on commodities in general, too. In the short term, losses are expected to mount until both precious metals can find support under current prices, market watchers said, but the long-term picture hasn’t changed.

At 11:40 a.m. EST February gold futures on the Comex division of the New York Mercantile Exchange are at $1,348.70 an ounce and March silver futures are at $27.56 an ounce.

February gold futures broke through support at two key price levels: $1,360 and $1,350, and that helped to trigger selling, said George Gero, vice president and precious metals strategist with RBC Capital Markets Global Futures.

Silver, meanwhile, broke through support at $28 as gold dropped, also encouraging sales.

Both gold and silver have seen investment outflows from the exchange-traded funds lately and this reallocation of assets to other markets has pinched these precious metals. Stephen Platt, senior account executive with Archer Financial Services, said some of this money is moving to other undervalued commodities after the big price run-ups gold and silver experienced in late 2010.

The investment outflow has not been solely confined to the ETFs, as the commitment of traders data from the Commodity Futures Trading Commission shown an exodus of investor bullish activity. Anne-Laure Tremblay, precious metals strategist at BNP Paribas, said net non-commercial positions on the Comex are 32% under the October peak.

She also noted short-term investor sentiment is shifting toward gold when looking at the options market. She said the implied volatility for call options near the money has moved below that of similar puts for maturities up to August 2011, so a negative skew has developed.

“With a negative skew present over a number of near-dated deliveries, this can also represent a sign that there is increasing risk aversion and the desire to buy insurance against a price correction,” she said. Tremblay added that open interest is rising for near-dated puts on closely watched strikes, such as the $1,300 level.

Calls are the right, but not the obligation to buy, a security at a specific price and a specific time. Puts are the right, but not the obligation, to sell.

Like Gero and Platt, Bart Melek, global commodity strategist with BMO Capital Markets, said there are concerns about more potential monetary tightening in China, which would have the goal of limiting inflation. Economic data from China Thursday showed continued breakneck growth, which could mean more interest rate hikes.

“I would think there is probably a big element of profit-taking here, which shouldn’t be a big surprise,” he said. “We’ve seen this kind of stuff before. But gold still has very strong fundamentals, mainly because you still have systemic risks out there.”

Thursday’s U.S. economic data also weighed on precious metals, as jobless claims saw a 37,000 decline. “Good economic figures today jobless claims (negate the) need for haven,” Gero said.

Although gold prices are holding in the mid-$1,340s, Gero said he is expecting margin-call selling to show up and that could mean more losses. He added he is not seeing any bargain hunting yet and instead is seeing dealer hedging. All of these actions are putting weight on prices. The February futures contract is under pressure as traders roll positions from the front-month contract to the April and other deferred contracts ahead of first-notice day.

If more margin-call selling materializes, that might mean buyers could stand on the sidelines hoping for cheaper prices. Gero said it might not be until late Friday that buyers return.

Platt said silver futures found weakness Thursday morning from sales in the cash side of the market.

Support For Gold, Silver Under Market

Both Gero and Platt put near-term support for gold at $1,325 and Platt said beyond that area, support is seen at $1,300 and $1,275. In silver Platt said $25-$26 should offer support.

Melek and Tremblay both said the long-term view for gold remains bullish as underlying worries about Europe and the U.S. remain unchanged.

“You still have massive U.S. debt and you still have potential for a blow-up in the sovereign-risk side of things in Europe. All of those things will get people into gold,” Melek said.


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