Gold slips as stocks soar

Prices give up early gains as rallying stocks take center stage.

By TheStreet Staff Sep 1, 2010 12:49PM

the streetBy Alix Steel, TheStreet


Updated at 3:15 p.m. ET


Gold prices slipped Wednesday, losing early gains as investors shrugged off weak private-sector-employment data and sent stock markets surging after an unexpected rise in a key manufacturing index.


Gold for December delivery settled $2.20 lower to $1,248.10 an ounce at the Comex division of the New York Mercantile Exchange. Gold today traded as high as $1,256.60 and as low as $1,244.10. The U.S. dollar index was slipping 0.8% to $82.53, while the euro was up 1% to 1.28 against the dollar. The spot gold price Wednesday was losing $3.10, according to Kitco's gold index.


Early Wednesday, gold prices built on Tuesday's double-digit gains as payroll processor Automatic Data Processing said that private-sector payrolls fell 10,000 in August. However, investors were drawn to stocks after the Institute for Supply Management's manufacturing index increased to 56.3 in August from 55.5 in July. Gold took a back seat as more confident investors sent the major U.S. indexes surging more than 2%.


By Wednesday afternoon the Dow Jones Industrial Average ($INDU) was up 233 points, or 2.3%, to 10,248, the S&P 500 ($INX) was gaining 29 points, or 2.8%, to 1,078, and the Nasdaq ($COMPX) was up 57 points, or 2.7%, to 2,172.


The popular gold exchange-traded fund SPDR Gold Shares (GLD) added almost four tons Tuesday and now holds 1,302.5 tons. Shares were falling 0.4% Wednesday to $121.60.

"The (gold) price could go up further and possibly even (reach) $1,260 . . . going into the Labor Day weekend," says Jeffrey Christian, the managing director of CPM Group. "We're sort of comparing this to some extent to August of 2007 when gold didn't really take an August pause." In August of this year the gold price surged 5%, compared with 2008 and 2009, when the price fell 8% and 0.4%, respectively.


Christian does see higher prices for the rest of 2010 but doesn't think it will be a straight move up. "We think it will come off a bit in early September, but we think it will go to $1,300 and maybe even higher in late September, early October."


So with gold making a run for its record intraday high of $1,264 an ounce, it leaves many investors wondering if they should buy gold.


Most gold experts would say investors should always have 3% to 10% of a portfolio in gold as protection, ranging from gold stocks to futures to ETFs to bullion. In order to reach that allocation, most experts would say to buy gold on dips. But the truth of the matter is, despite headlines chronicling the metal's run, the gold market is very small and a lot of investors still don't own it.


A common mistake investors tend to make is chasing the gold price. When prices increase by double digits and the media talks about $1,300 gold, some investors panic and rush in to buy the metal for fear of missing the boat. The same is true in the reverse. If gold falls by double digits, many investors dump their positions because they don't want to be left owning "cheap" gold.


Despite gold's almost 10-year bull run it doesn't mean there aren't corrections along the way, which create attractive buying opportunities. According to Kitco's spot gold chart for 2010, the price hit an average low in February of $1,058 an ounce and an average high in June of $1,261 leaving investors a $200 trading range to buy.


But before you pull the trigger, there are three factors to keep in mind: profit-taking, the dollar and India.


With gold one of the few assets recently to yield a positive return, investors might be forced to sell gold for cash to cover losses in the stock market. This pressure might be especially thick as traders return from summer vacations next week.


Gold also typically moves in inverse correlation to the U.S. dollar. This trend can be bucked during times of real economic panic, as both assets can be seen as safer places for an investor to park money.


But, historically, a strong dollar makes the dollar-backed commodity more expensive to buy in other currencies. The U.S. dollar Wednesday was trading lower as investors opted for stocks over the safety of the currency, which may have been cushioning gold's decline somewhat. This trend could be short-lived, however, if the Labor Department delivers a weak jobs number Friday and investors seek the haven asset again.


Finally, investors need to pay attention to demand from India. Gold jewelry purchases account for 60% of total gold demand. According to the World Gold Council's most recent report on Gold Demand Trends, India bought 123 tons of gold jewelry in the second quarter, down 2% from a year earlier.


India is the largest buyer of gold in the world, but the market is extremely price-sensitive. Jon Nadler, senior analyst at, says gold dealers in India tell him "that customer orders are clustered at $1,180 and below and that preference among locals seems to be at or around those levels."


With prices now around $1,250, will consumers buy? Historically, as the price moves higher, so does India's tolerance for paying up for gold. But it usually takes a few months for a new range to settle in and for buying to re-emerge.


The problem is that markets are looking for India to buy gold right now. India is preparing for a host of festivals such as Ramadan, post-monsoon wedding season and Diwali, which usually trigger large amounts of gold jewelry buying.


The absence of substantial demand could hurt gold prices even as investment demand stays strong.


Scrap gold "was making its way onto India's shopkeepers' shelves," Nadler says. "Physical buyers in India ... turned away from buying the precious metal for the moment, as the perception that gold prices are too high and that they might correct soon dented festival-related shopping enthusiasm."


In other gold news, the Wall Street Journal reported that JPMorgan (JPM) will close its commodity proprietary trading desk to meet with the recent financial reform law. Its prop desk is in London and it's unclear as to how its absence in the market will affect the gold futures market.


Silver prices settled down 4 cents to $19.39 per ounce while copper shot up 11 cents to close at $3.48 per pound. Base metals were rallying on the news that China's manufacturing rose in August.


Gold mining stocks, a risky but profitable way to buy gold, were mostly lower Wednesday. Barrick Gold (ABX) was down 3% to $45.34 while Newmont Mining (NEM) was falling 1.4% to $60.45. Randgold Resources (GOLD) was losing 0.8% to $91.80 and Freeport-McMoRan (FCX) was soaring 5.4% to $75.90.


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