Share By Melissa Pistilli-Exclusive to Silver Investing News

Precious metals prices have suffered deep blows in recent trading days as investors fret over the direction of possible interest rate moves and the dollar.

“We are seeing liquidation from a lot of fast money that had jumped into gold on the premise that they want to diversify away from US dollar-based assets,” said Adam Klopfenstein, senior market strategist at Lind-Waldock.

The price of gold has fallen nearly $100 since hitting a high of $1225 an ounce last week. Silver has tracked gold lower from closing at $19.26 an ounce December 2 to close at $17.44 Wednesday. Abating inflation concerns have placed downward pressure on silver and gold prices.

Good news on the unemployment front and Chairman Bernanke statements this week that inflation is still under control, made the dollar more attractive than precious metals. Worries that economic recovery will be slow or stalled are also counteracting inflation concerns.

The markets are rife with volatility at the moment and investors should exercise caution. Several nations are facing mounting debt concerns and the worry is that debt problems in larger economies may have a terrible global impact on economic recovery and this is causing a lot of uncertainty in global equities and commodities.

Tuesday’s announcement that Moody’s is contemplating downgrading the US and Britain’s credit ratings sent investors out of stocks and into the dollar, further impacting precious metals prices.

The dollar’s recent strength has also served as a catalyst for a round of profit-taking in precious metals. “We’re entering that time where you have end-of-year position squaring by hedge funds,” said Michael Gross, OptionSellers.com futures analyst. So, we can probably expect more sell-offs in silver and gold before month’s end.

However, to add to an already seemingly confused and volatile market, some analysts, like those Credit Suisse, see precious metals staging another rally before the year is out.

Correction Expected

Given the colossal run-up in silver and gold prices over the last three months, many analysts are saying a correction was certainly due.  A lot of money has gone into precious metals as safe haven from dollar weakness.

But most analysts remain confident positive long-term fundamentals are still in play.

Bank of America Merrill Lynch sees silver averaging $17.60 an ounce in 2010. Barclays Capital pegs silver at $16.50 for Q1 of next year. Commerzbank puts gold at an average of $17.50 for Q4 2009, $18 for Q1 2010, dropping to $16 in the second quarter. Deutshe Bank expects silver to average $17.70 in Q42009, $18.90 in Q1 2010 and $20.03 for the whole of next year. HSBC sees silver at $17 an ounce in 2010.

Over the short-term we can expect the volatility in the markets to continue as investors mull an uncertain economic future. For now, as is the case with such a complex market as silver, several factors will continue to influence price movements including concerns over economic recovery in the US and globally, the direction of the dollar, demand for industrial metals, and the appeal of safe-haven assets.

This latest round of downward pressure is a healthy correction needed to shake the speculative money out of the market. Silver should be able to hold its ground through the second half of next year before hitting the summer doldrums.

Questions about this article? Leave a comment below or contact our editorial team at editor@resourceinvestingnews.com.