Sell-Off Tests 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 exiting 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 U.S. treasuries.

Gold At Four-Month Low
The front-month Comex gold contract settled at $1,604 -- its lowest settlement in four months -- with a further decline to the $1,580s during Asian trading this morning. The price seems to have stabilized 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, at over 2%. Buying support for silver should exist around $28.50.

Recent History
The largest gold producers are fairing even worse at the moment, with the HUI Index of leading gold shares falling below 400, and may be subject to 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 price of gold -- is down to levels seen in late ’08, and at roughly the same levels seen during the late 1990's/early 2000's. If we’re experiencing a bull market in precious metals, it certainly doesn’t look like it, especially in light of 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.

Where we go from here in terms of precious metals, the dollar and euro is anyone's guess. But do take note of the dollar's failry muted gains of late. Despite the “sell Europe” theme that's been echoing, lately, one can't help but wonder if 82.00 is a hard-ceiling for the USDX.