Gold settles lower ahead of FOMC

Prices slipped as investors waited for news of more monetary easing from the Federal Reserve.

By TheStreet Staff Oct 12, 2010 10:01AM

commodities and metals investment news from thestreetBy Alix Steel, TheStreet

 

Updated at 4:42 p.m. ET

 

Gold prices settled lower Tuesday before the minutes from September's Federal Open Market Committee meeting were released.

 

Gold for December delivery fell $7.70 to settle at $1,346.70 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,356.30 and as low as $1,341.40 today.

 

According to minutes from the FOMC's Sept. 21 meeting  released at 2 p.m. ET, members of the Fed's policy-setting committee largely agreed that additional quantitative easing measures would be needed, but differed on the timing of when such action would be appropriate. The U.S. dollar fell on the news, while gold prices pared some of their losses and stocks rebounded.

 

The Dow Jones Industrial Average ($INDU) closed up 10 points to 10,020 after having lost nearly 100 points early in the day. The S&P 500 Index ($INX) gained 4 points to 1,170, and the Nasdaq ($COMPX) added 16 points to finish at 2,418.

 

The U.S. dollar index was flat at $77.51, while the euro was gaining slightly to $1.39 against the dollar. The spot gold price was down $4, according to Kitco's gold index.

 

Gold prices were hit early on by a stronger U.S. dollar, money tightening in China and worries that the Federal Reserve's quantitative easing program might not be as huge as previously thought.

"There is a risk of long liquidation," James Moore, an analyst at thebulliondesk.com, said in his daily metals report. "However, we expect gold to remain underpinned by physical and investment demand as speculation increases the Fed could undertake additional QE next month."

 

Goldman Sachs (GS) raised its price target for gold prices based on QE2 to $1,650 in the next 12 months. The firm believes that QE2 will keep real interest rates negative for some time and push gold prices higher. Real interest rates are the interest rate minus the inflation rate. With more money in circulation, and the inflation rate and key interest rates at 0%, negative rates will persist.

 

Gold becomes attractive when rates are negative because the dollar is literally worth less. If real negative interest rates are at 5%, you would make 95% on every dollar. Since your money is valued at a lower rate, gold becomes a safer place to preserve your wealth.

 

Goldman did say that if the Fed raised rates sooner than expected, it would have a negative effect on gold prices.

 

QE2 speculation hit a snag with recent comments from Janet Yellen, the vice chairman at the Fed, at a meeting in Denver. She said record-low interest rates might hurt the economy in the long term if they lead companies to take on more risk. The Fed is still expected to announce a bond purchase at its next policy-setting meeting, but the dollar amount of the program is unknown.

 

The news helped the U.S. dollar hold its ground, which weighed on gold. The metal's price moves inversely to the U.S. dollar because as the U.S. currency strengthens, the dollar-backed commodity becomes more expensive to buy in other countries. Also, as the dollar becomes more attractive to investors, gold loses some of its appeal as an alternative form of money.

 

John Nadler, a senior analyst at Kitco.com, says recent "ultra-bullishness in gold and corresponding super-bearishness in the U.S. dollar remains the overwhelming order of the speculative trading day."

 

Nadler thinks this trend could reverse violently and cause a sell-off in gold. The gold exchange-traded fund SPDR Gold Shares (GLD) has lost 14 tons in the past week.

 

The final headline item weighing on gold prices Tuesday was the news that China raised its reserve requirements for banks, yet again, in order to curb lending and squash inflation. According to Goldman Sachs, the top six Chinese banks must now keep 17.5% of their deposits in their reserves. The move takes more money out of circulation, which means the Chinese have less purchasing power and less money to buy gold.

 

In the second quarter, gold demand in China grew 25%, according to a report by the World Gold Council. Although investment demand is what really led this increase, jewelry demand rose from 72.5 tons to 75.4 tons. Emerging market demand, like that in China, has helped support higher prices for gold.

 

Many experts are anticipating gold to trade in a tight range until the Fed's next meeting in November. "I think we are going to see sideways action," said Phil Streible, a senior market strategist at Lind-Waldock. "Still we're looking on buying any corrections. . . . I think $1,325 is a good level of support." Streible is looking for higher prices by the end of the year.

 

Silver prices settled down 20 cents to $23.15 per ounce, while copper finished flat at $3.79 per pound.

 

Gold mining stocks, a risky but sometimes more profitable way to invest in gold, closed mostly lower Tuesday.

 

Barrick Gold (ABX) fell 0.6% to $48.44, while Newmont Mining (NEM) lost 0.9% to close at $62. Randgold Resources (GOLD) dropped 0.9% to $102.20, and AngloGold Ashanti (AU) finished flat at $46.80.

 

Harmony Gold (HMY) lost 0.7% to close at $11.41 after the stock received a downgrade at Morgan Stanley (MS) Tuesday to equal-weight from overweight.

 

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