Commodity Watch: Gold Getting Attractive Again, But Not Silver (GLD, GDX, GDXJ, SLV, SIL, NAK, MIDSX)

The failure of the European Central Bank and the International Monetary Fund to reach an agreement on a second bailout package for Greece, combined with a variety of other poor economic news, has sent investors back to the safe haven of gold. There’s nothing like TV images of rioting in the streets of Athens to concentrate the mind.

Since nudging up against $1,550/ounce earlier this month, gold prices have fallen as low as around $1,510/ounce, but have come out of their doldrums today, posting a high so far of around $1,535/ounce. And while the European financial crisis is probably the main reason for the rise, there are a few others.

As Forbes points out, eurozone countries are no longer selling gold.  They are instead buying it, even if the amount is comparatively small. The single most compelling reason for the Eurozone to hold onto its gold, and to buy more, is that central banks don’t want to sell gold during a major crisis.

Another reason for more gold buying is the inability of the US Congress to reach an agreement on raising the US’s debt ceiling. The effects of a Greek default might be scary, but if the US misses a debt payment the effects could be catastrophic. As the August 2nd deadline to raise the ceiling approaches, growing fear of a US default sends investors to gold, not euros or yen.

Weak economic news from the New York state manufacturing index also factors into a spurt in gold buying, as do creeping US inflation and a poor report on new US housing starts. Taken together these indicate that US economic recovery has stalled or, at best, is getting better even more slowly than expected.

Holdings in the SPDR Gold Trust (NYSE: GLD) total more than 38.5 million ounces, more than half the gold held in all ETFs. The total has fallen by more than -8% since the beginning of the year. If gold prices begin to rise again, the fund will start adding bullion again. The fund is trading up a fraction today, at $148.69, in a 52-week range of $113.08-$153.61.

One final factor that could contribute to rising gold prices is increasing demand from emerging markets in China and India. China, especially, is looking to hedge its huge dollar holdings with something that is more inflation-proof.

Gold miners, which should do well if demand for gold increases, face the twin problems of higher production costs and lower-grade ores. The Market Vectors Gold Miners ETF (NYSE: GDX) and the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) are both off nearly -15% since the beginning of the year.

Northern Dynasty Minerals Ltd. (AMEX: NAK) has been weak as could be in the market sell-off due to the long-term outlook and speculative nature of the company, but this was given as one of the top undiscovered picks by the Midas Fund (MIDSX) in our recent interview where fund manager Tom Winmill said he still sees $1,700.00 gold.

Finally, silver may have had its moment in the sun. Where traders once believed that potential rise was more likely than a potential fall, the situation is now reversed. Spot silver is up slightly today, at $35.61/ounce. The iShares Silver Trust (NYSE: SLV) is up about 0.5%, to $34.84, in a 52-week range of $17.06-$48.35, but the overall direction is trending downward. The Global X Silver Miners ETF (NYSE: SIL) is down nearly -2% today, at $22.92, in a 52-week range of $13.80-$31.34.

Paul Ausick