Gold hovers around $1,300

Prices maintain record highs as central banks increasingly hold on to reserves.

By TheStreet Staff Sep 27, 2010 10:11AM

thestreetBy Alix Steel, The Street

 

Updated at 3:27 p.m. ET

 

Gold prices hovered around $1,300 Monday despite some selling as reports of weak central bank sales during the past year supported higher prices.

 

Gold for December delivery settled 50 cents higher to $1,298.60 an ounce at the Comex division at the New York Mercantile Exchange. Gold Monday traded as high as $1,301.30 and as low as $1,295.80 on light volume.

 

The U.S. dollar index was slipping 0.1% to $79.30, while the euro was flat at 1.35 against the dollar. The spot gold price was adding 40 cents, according to Kitco's gold index.

 

Record-high gold prices were sparking some selling as well as some tentative buying as investors remained cautious about the global economy. Moody's downgraded Anglo Irish Bank's senior unsecured debt to one level above junk status, which highlighted the fact that Ireland still has a lot of bailout money to issue as it tries to manage the nation's largest flailing bank.

Traders are also shuffling their books as the third quarter comes to a close on Thursday. Some will need to ramp up their gold positions to show they own the metal while others might need to sell gold to show a profit.

 

"We anticipate further resistance short-term on a mix of profit-taking and option/technical selling," James Moore, an analyst at thebulliondesk.com, wrote in his daily metals report. "But with little change in the broader economic picture and investors concerned about further devaluing of fiat currencies we expect the bullish trend to continue."

 

Gold is the go-to investment during times of uncertainty, and there is a lot out there for investors to fret about. First off, most analysts expect the Federal Reserve to announce another round of quantitative easing at its next meeting in early November. Investors already have been buying gold as protection against a weakening dollar.

 

The midterm elections are just over a month away, and although the expectation is for a stalemate in Congress, with the House going to the Republicans, the uncertainty is providing yet another reason for investors to own gold. To add fuel to the fire, the third quarter officially ends Thursday, and many companies have warned of choppy results.

 

Also supporting record gold prices was the news that central banks have sold only 94.5 tons of gold in the past year. Central banks are able to sell a combined total of 400 tons each year, according to the Central Bank Gold Agreement. Their lack of selling underscores the trend that central banks have transitioned into net buyers of gold rather than net sellers.

 

"There has been a fundamental shift in the behavior of central banks over the past few quarters," said Natalie Dempster, the head of investment for the World Gold Council. "Central banks on the whole have been net sellers of gold for the past two decades."

 

Since the second quarter of 2009, central banks from emerging-market countries have led this transition into buying gold. The Reserve Bank of India has been actively buying gold from the International Monetary Fund. India now holds 7.5% in gold reserves, which is still considerably lower than the 20% of gold reserves it held in 1994.

 

One of the biggest buyers is China. Over the past five years, the country secretly increased its gold holdings from 600 tons to 1,054 tons. China currently holds only 1.6% of its reserves in gold. Dempster says that if the country were to reallocate its holdings to 3%, it would need to buy 1,000 tons of gold. Compare this with the U.S. and Portugal, which hold 70% and 80% of their reserves in gold, respectively.

 

"Some banks, like India, have been rebalancing as the percentage of gold in total reserves has fallen over time," Dempster said "Others are looking to diversify away from dollar-based assets, and with sovereign debt concerns continuing to grow around the world, gold's attractiveness as a reserve asset that bears no credit risk continues to grow."

 

Central banks, in general, regard reserve allocation as an ongoing government policy. Although the governments consider fundamentals like dollar weakness and the sustainability of gold as money, they don't trade gold; they buy it as an investment. They will buy gold when they feel gold reserves are too low when compared with other holdings.

 

Gold prices have rallied 30% in the past year as central banks have held on to their gold, indicating a shift into gold holding and not just gold buying. The U.S. is currently the largest holder of gold, with 8,133.5 tons, which accounts for 72% of its reserves.

 

In an analyst note Friday, Dick Bove, the vice president of equity research at Rochdale Research, pointed out that the Federal Reserve values its gold at $42.22 per ounce, or $11 billion vs. $338 billion in today's prices.

 

"The gold backing of each American dollar is rising rapidly," Bove said. "This increase in value is accelerating, not decelerating, as the growth in dollars is failing to keep pace with the growth in the value of gold."

 

Silver prices have also hit record levels, their highest since 1980. Prices settled 7 cents higher Monday to $21.47 per ounce, while copper prices closed down 2 cents at $3.60 per pound.

 

Gold mining stocks, a risky but sometimes more profitable way to buy gold, were mostly lower on Monday. Barrick Gold (ABX) was down 1.2% to $45.81 while Newmont Mining (NEM) was losing 1% at $62.78. Randgold Resources (GOLD) was falling 0.7% to $101.48, while AngloGold Ashanti (AU) was up slightly at $45.25.

 

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