Gold slips as traders turn to stocks

Prices dropped from their recent record highs as investors reacted to a better-than-expected jobless claims report.

By TheStreet Staff Sep 9, 2010 10:15AM

metal and mining news from the streetBy Alix Steel, TheStreet


Updated at 4:12 p.m. ET


Gold prices fell from their recent record highs Thursday as investors turned to stocks after initial filings for unemployment benefits fell 27,000 to a better-than-expected level of 451,000.


Gold for December delivery settled down $6.60 to $1,250.90 an ounce at the Comex division of the New York Mercantile Exchange. Gold Thursday traded as high as $1,260.50 and as low as $1,243.50. The U.S. dollar index was rising 0.1% at $82.64, while the euro was falling slightly to 1.27 against the dollar. The spot gold price was down $10.70, according to Kitco's gold index.


Stocks couldn't hold their early levels but made modest gains on the day, with the Dow Jones Industrial Average ($INDU) adding 28 points to close at 10,415. The S&P 500 ($INX) finished 5 points higher at 1,104, and the Nasdaq ($COMPX) rose 7 points to 2,236.


Gold prices have been trapped in a tight range at or around their record highs as volume has remained light. Gold is flat on the week after settling at a new record high of $1,259.30 an ounce on Tuesday.


The tug of war in prices has been highlighted by a series of "good" reports, which have then been tempered by red flags. Weekly initial jobless claims fell 27,000 to 451,000, and exports in July grew 1.8% -- news that led investors to tentatively buy stocks while leaving their gold positions relatively unchanged. Jobless claims need to fall below  400,000 for a recovery to be substantial, and July's export number comes after a weak June, which is leaving investors somewhat distrustful.

High gold prices have also been supported by investors' worries that weaker eurozone nations are worse off than first thought. Despite a successful Portuguese bond auction, the yield on the 10-year note in Portugal is still 5.8%, compared with Germany's 2.3%. The more reluctant investors are to lend money to a country, the higher the yields go. Ireland's bailout of its third-largest bank, Anglo Irish, reassured investors, but the cost of the bailout is still up in the air.


Traders were also digesting the news that the Federal Reserve's 12 districts reported "widespread signs of deceleration," according to its latest Beige Book. Typically, investors would turn to gold as a safe haven with that kind of dismal forecast. Gold prices instead lost some steam on the report, which indicates that the bad news is already priced in, and leaves gold waiting for a catalyst to move it much higher.


Many gold bugs are pinning their hopes on India's fall wedding and festival season to ignite a flurry of gold jewelry buying. "A strong Indian wedding season would most likely move prices for gold higher," says Will Rhind, head of U.S. operations for ETF Securities.


One concern is that record-high prices might hurt demand in the price-sensitive market. "Our expectation is that demand in India will be relatively subdued this year," says Jeffrey Christian, the managing director of the CPM Group. "The high price has really taken a toll on Indian demand." Jewelry demand picked up in July as prices slid to the $1,160 area, but now consumers must contend with gold at $1,250 an ounce.


Christian is looking for a slight pullback in prices as demand wanes, followed by higher prices in late fall buoyed by strong investment demand. Christian recommends taking a long position in gold or gold assets and hedging them with out-of-the-money puts.


But not all analysts are as wary. Rhind says that "consumers all around the world have had to adjust to higher gold prices. . . . We're used to a new price being set in the gold market."


Silver prices settled down 15 cents to $19.85 per ounce, while copper closed 6 cents lower at $3.44 per pound.


Gold mining stocks, a risky but sometimes more profitable way to buy gold, closed mostly lower. Barrick Gold (ABX) was down 2.8% to $44.17 and Newmont Mining (NEM) fell 2.1% to $60.26. Randgold Resources (GOLD) managed to gain 0.6% to close at $93.90, while Goldcorp (GG) finished down 1.6% at $41.39.


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