Gold hits new highs

Prices set records again on the back of a weaker US dollar.

By TheStreet Staff Oct 1, 2010 9:51AM

thestreetBy Alix Steel, TheStreet

 

Updated at 2:34 p.m. ET

 

Gold prices broke to new highs Friday at the start of the fourth quarter on continued U.S. dollar weakness.

 

Gold for December delivery settled $8.20 higher at $1,317.80 an ounce at the Comex division of the New York Mercantile Exchange. Gold today traded as high as $1,322 and as low as $1,307.30.

 

The U.S. dollar index was slipping 0.8% to $78.13, while the euro was rallying 1% to $1.38 against the dollar. The spot gold price Friday was adding $6.60, according to Kitco's gold index.

 

Gold prices got a pop this morning as the U.S. manufacturing index came in weaker than expected, falling to 54.4 in September. Although any number over 50 indicates growth, the slowdown reignited fears over growth problems in the U.S. and highlighted gold's appeal as a safe-haven asset.

 

Even before the ISM report, gold was rallying Friday. Continued speculation that the Federal Reserve will bow to some form of monetary easing at its next meeting in November has been weighing on the dollar and helping gold prices. The two forms of currency typically trade inversely, as the price of gold, a dollar-backed commodity, is measured in a currency that is less valuable.

The dollar also has been losing steam as a potential currency war heats up in China. The House passed a bill Wednesday that would allow American companies to lobby for higher taxes on Chinese imports. The goal is to make American goods cheaper and more attractive to consumers while the U.S. government tries to pressure China to let its currency rise in value against the dollar.

 

Although the Senate is not likely to vote on the bill until after midterm elections, the threat of an even weaker dollar has been helping gold prices rise. Gold has shrugged off a better-than-expected September manufacturing activity report from China, which expanded at its fastest pace in four months.

 

Gold prices rallied 6% in the third quarter and almost 5% in September alone, triggered largely by hedge fund and momentum buying. Gold's rally might spark some selling at the start of the fourth quarter, but many analysts expect more of a rally from gold and other metals.

 

"The metals . . . look set to post further gains on a mix of solid fundamentals, technical momentum and diversification from fiat currencies as investors edge towards tangible assets such as commodities," says James Moore, and analyst at  thebulliondesk.com.

 

Aside from strong investment interest, demand for the physical metal has also been strong despite record-high prices.

 

Gregory Marshall, the CEO of Global Asset Management, a wholesale bullion and coin dealer in the U.S., says he is seeing strong buying in the U.S. and Canada in all the precious metals. The U.S. Mint "can't keep up with demand. . . . The people who are entering the markets are trying to save themselves over the destruction of paper currencies," Marshall said.

 

Marshall added that the average investor is still not in the gold market, which is why he sees demand building and $1,500 gold "just around the corner."

 

"We're seeing gold on investment television stations . . . (and) as it plays more and more in the general press, it sparks more and more interest. . . . I do see new people coming in more and more."

 

Marshall said every pullback triggers more buying, which then helps push prices back up. The most popular items are bullion coins, which have the purest gold, 24-karat, such as the American Buffalo and Canadian Maple Leaf.

 

Marshall said demand isn't just for gold but for the other precious metals as well, the most popular being palladium, which has popped 35% year to date.

 

Silver prices settled up 24 cents to $22.06 per ounce, while copper added 4 cents to close at $3.69 per pound on strong manufacturing activity in China.

 

Gold mining stocks, a risky but sometimes more profitable way to buy gold, were rising Friday. Barrick Gold (ABX) was up 1.2% to $46.84 while Newmont Mining (NEM) was gaining 1.2% to $63.53. Randgold Resources (GOLD) was rising 1.8% to $103.30, and AngloGold Ashanti (AU) was up 1.7% to $47.02.

 

Capital Gold (CGC) was down 2.3% to $4.72 after the company accepted a merger deal with Gammon Gold (GRS) for $4.57 per share, or $288 million. Gammon Gold beat out Timmins Gold, which announced a hostile bid on Monday for the smaller company for $4.50 a share.

 

Gammon Gold is almost three times the size of Timmins and will produce 100,000 to 110,000 ounces of gold this year, according to the company's Web site. Capital Gold owns and operates the El Chanate open pit gold mine in Sonora, Mexico, which is expected to produce between 65,000 and 70,000 ounces in 2011.

 

A press release from Gammon Gold said that the transaction would make the company "among the lowest cost producers in the industry." For the second quarter, Gammon produced 29,231 ounces of gold at a cash cost of $494, which was a 17% increase from the same period a year earlier.

 

This is not only the latest trend in M&A in the gold mining sector but also the most recent case of a larger company outbidding a smaller company both in need of replenishing their gold reserves. Goldcorp (GG) recently outbid Eldorado Gold (EGO) for Andean Resources, a deal Eldorado had been working on for years.

 

As gold demand grows, gold miners are feeling the pressure to replace their reserves quickly to take advantage of rising prices. Identitfiable investment demand grew 118% in the second quarter, according to the World Gold Council, spurred by skyrocketing exchange-traded-fund demand. The largest ETF SPDR Gold Shares (GLD) has added 179 tons of gold this year.

 

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