Gold rises ahead of Fed

Prices continued to climb in advance of the Federal Reserve's policymaking meeting this week.

By TheStreet Staff Sep 20, 2010 10:23AM

metals and mining investment advice and news from thestreetBy Alix Steel, TheStreet

 

Updated at 4:09 p.m. ET

 

Gold prices rose Monday as investors bought the metal ahead of a meeting of the Federal Reserve's policymaking arm.

 

Gold for December delivery settled $3.30 higher to $1,280.80 an ounce at the Comex division of the New York Mercantile Exchange. Gold Monday traded as high as $1,285.20 and as low as $1,275.60. The U.S. dollar index was down 0.1% to $81.32, and the euro was up slightly to 1.31 against the dollar. The spot gold price Monday was rising $4.40, according to Kitco's gold index.

 

U.S. stock markets rallied as well, as the Dow Jones Industrial Average ($INDU) gained 146 points, or 1.4%, to close at 10,754. The S&P 500 ($INX) finished up 17 points, or 1.5%, at 1,143, and the Nasdaq ($COMPX) added 40 points, or 1.7%, to 2,356.

 

Gold prices were continuing to climb toward $1,300 an ounce as investors bet on the Federal Reserve's announcing another round of quantitative easing Tuesday. If the Fed decides to buy more government bonds and expand the size of its balance sheet, it means the central bank will also need to run its printing presses.

 

More U.S. dollars in circulation would devalue the currency and make gold even more attractive as a form of money that retains some value. If the Fed doesn't announce more monetary easing, traders might rotate out of gold in favor of riskier assets in the short term. But the expectation is that the Fed will commit to this course of action, if not Tuesday then soon.

"Volatile trade looks set to continue in the week ahead," James Moore, an analyst at thebulliondesk.com, said in his daily metals report. Moore says gold prices would benefit from some consolidation. "However, the mix of economic, debt and also inflation jitters will continue to draw investors towards the safe-haven asset," he said.

 

Gold prices were also benefiting from worries that Ireland might need to tap the European Union and the IMF for a bailout. Barclays reportedly said in a research report that the country might need more money if economic conditions worsen and if it is forced to further bail out its financial system. Ireland's finance minister has been trying to deny these speculations, but any signs of a ballooning sovereign debt crisis will push gold prices higher as investors buy the metal as insurance.

 

Gold prices rose 2.4% last week, while silver prices surged 4.6%. The popular gold exchange-traded fund SPDR Gold Shares (GLD) added 6 tons of gold Friday as investors piled into the metal. The ETF now holds more than 1,300 tons. iShares Silver Trust (SLV), in comparison, has 9,381 tons.

 

The consensus is that gold prices will hit $1,300 sometime soon as the buying frenzy stays strong. But the question remains: What happens after gold breaks that psychological level? Most seasoned analysts say $1,300 is just a number but a dramatic one nonetheless.

 

David Morgan, founder of Silver-Investor.com, said, "I would doubt it goes much beyond $1,300. (In the short-term), commodities don't typically like round numbers." Morgan thinks $1,350 is a possibility by the end of the year but that prices will have a few corrections before then.

 

Silver prices settled down 1 cent to $20.80 per ounce, while copper closed 2 cents lower at $3.51 per pound.

 

Gold mining stocks, a risky but sometimes more profitable way to buy gold, were rallying with the equity market Monday. Barrick Gold (ABX) finished up 1% at $46.46 while Newmont Mining (NEM) gained 0.4% to $63.28. Randgold Resources (GOLD) closed 1.4% higher at $99.53 and AngloGold Ashanti (AU) rose 1.2% to finish the day at $44.11.

 

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