Gold gains amid tug-of-war trading

As some investors sold their positions to cash in on last week's rally, others continued to buy gold as a hedge against inflation.

By TheStreet Staff Oct 11, 2010 9:47AM

thestreetBy Alix Steel, TheStreet

 

Updated at 2:18 p.m. ET

 

Gold prices rebounded from early losses to climb higher Monday, as investors continued to buy the metal as a hedge against an expected second round of monetary easing.

 

Gold for December delivery added $9.10 to settle at $1,354.40 an ounce at the Comex division of the New York Mercantile Exchange. Gold today has traded as high as $1,356.30 and as low as $1,341.10.

 

The U.S. dollar index was up 0.1% to $77.40, while the euro was down 0.7% to $1.39 against the dollar. The spot gold price was up $5.40, according to Kitco's gold index.

 

Gold's 2% rally in October has prompted some investors to cash in their positions for a profit, while others continue to buy gold in anticipation of more monetary easing from the Federal Reserve. The minutes from the Fed's previous meeting are due out Tuesday, and they will offer an indication of how the Fed is likely to act.

Fed Chairman Ben Bernanke has come out in opposition of raising the inflation target, which would have meant that the Fed would run its printing presses longer to reach a higher inflation rate over an extended period.

 

Nevertheless, it seems like some type of government bond purchase program, whether long or short term, will happen, especially after Friday's weak unemployment report. There are dissenting voices within the Fed about how the central bank should pump more money into the system, so traders will be eying the Fed minutes for some direction.

 

Most analysts think that investors will keep hedging their riskier bets with gold and that prices will head higher despite intermittent selling and minor corrections.

 

"I have actually been buying some puts on some major mining companies as a hedge," says David Morgan, founder of Silver-Investor.com. "There's a lot more people on the bullish side than bearish side. . . . I'm just putting a little protection on here."

 

The annual meeting of the International Monetary Fund and world bank leaders over the weekend proved that there is no end in sight to the recent currency battles that have been brewing. Countries, particularly those from emerging markets like Brazil, have been trying to lower the value of their currencies in order to help export demand.

 

Leaders were trying to nudge China to let its currency rise quickly in value to help other countries, but no agreement was reached. Signs of currency fragility are good for gold prices because the metal shines as an alternative form of money that can't be artificially inflated.

 

Also providing some support for prices was a report on indianexpress.com that said gold imports in India rose 30% in September from August to 34.8 tons.

 

September is typically a strong gold-buying month in India. As the wedding and festival season kicks off, there is heavy consumer demand for traditional gifts of gold jewelry.

 

The Nasdaq ($COMPX) reported that India's gold ETF holdings in September rose 90%, which could also account for the import pop of gold into the country.

 

Other emerging markets are also beefing up their gold offerings. Dow Jones Newswires reported that a new gold exchange-traded fund will launch in Hong Kong in October. The Value Gold ETF is a physically backed ETF, where the gold will be held locally.

 

Physically backed ETFs have become widely popular as investors diversify into gold. The U.S. gold ETF SPDR Gold Share (GLD), the second-largest ETF in the world, currently holds 1,288.23 tons, a 98% increase from two years ago.

 

Investment demand has recently outpaced jewelry demand as a driver in higher gold prices. In the second quarter, identifiable investment demand from bullion and gold ETFs rose 118%, while jewelry demand fell 5%, according to the World Gold Council.

 

Although investment demand is becoming increasingly important, jewelry still accounts for 60% of total gold demand, which makes physical demand from emerging market countries as well as investment demand instrumental in supporting higher gold prices.

 

Silver prices rose 24 cents to settle at $23.35 per ounce, while copper closed up 2 cents at $3.79 per pound.

 

Gold mining stocks, a risky but sometimes more profitable way to invest in gold, were mixed Monday. Barrick Gold (ABX) was up 0.1% to $48.60, while Newmont Mining (NEM) was falling 0.7% to $62.44. Kinross Gold (KGC) was gaining 0.4% at $19.08, and Agnico-Eagle (AEM) was adding 0.2% at $72.69.

 

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