Gold settles at another record high

By Alix Steel, TheStreet

 

Updated at 4:16 p.m. ET

 

Gold prices set records again Wednesday as momentum buying, unexpected job losses and currency fears pushed investors into the precious metal.

 

Gold for December delivery added $7.40 to settle at $1,347.70 an ounce at the Comex division of the New York Mercantile Exchange. Gold today traded as high as $1,351 and as low as $1,340.

 

The U.S. dollar index was down 0.5% at $77.40, while the euro was up 0.7% to $1.39 against the dollar. The spot gold price Wednesday was adding $7.90, according to Kitco's gold index.

 

Stocks were mixed Wednesday; the Dow Jones Industrial Average ($INDU) closed 23 points higher to 10,968, but the S&P 500 ($INX) lost 3 points to 1,157, and the Nasdaq ($COMPX) finished down 25 points to 2,374.

 

Gold's rise followed a 2% rally on Tuesday. James Moore, an analyst at thebulliondesk.com, said the buying "mentality looks set to provide additional upside momentum with gold potentially looking to target $1,400."

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George Gero, the vice president of global futures at RBC Capital Markets, believes there is a perfect storm brewing for stronger gold prices with higher open interest in the futures market teaming up with higher moving averages and higher closes. Those technical indicators are all met against the backdrop of weaker global currencies as governments race to debase their currencies to increase exports and spur growth.

 

"Other currencies (are) weakening to the point that the world needed to hedge the devaluation with gold," Gero said.

 

Morgan Stanley raised its bullish forecast to $1,512 an ounce.

 

The story continues Wednesday with the private sector shedding 39,000 jobs in September, according to the most recent ADP report. The disappointing number is helping support the belief that the Federal Reserve will expand its balance sheet and buy more government debt. The Fed could follow the Bank of Japan, which announced a $60 billion asset purchase program of its own earlier this week.

 

Worries in Europe also continue, as Fitch downgraded Ireland from AA- to A+ with a negative outlook because of higher-than-expected costs related to bailing out Irish banks. The International Monetary Fund lowered its 2011 growth forecast for advanced economies to 2.2% from 2.4%.

 

Record-high gold prices, however, have some analysts warning of a violent pullback and increased volatility, especially headed into Friday's jobs number. A strong figure could crimp the size of the Fed's money printing and bond purchase program, while a weak number would all but ensure another round of quantitative easing.

 

U.S. Trust President Keith Banks, according to a report in Reuters, said the company is not recommending gold right now because the "things driving (high prices are) beyond the types of things" that can add value.

 

Banks is not alone in his cautious belief. Barclays Wealth has been recommending to clients that they short the SPDR Gold Shares (GLD), the most popular physically backed exchange-traded fund. Barclays believes that when the crisis premium comes out of the market, gold could fall to $800 an ounce. The ETF currently holds 1,301.91 tons of gold.

 

Jon Nadler, a senior analyst at Kitco.com, believes gold prices should live between $800 and $1,200 an ounce once the crisis abates "as investors come back to more level-headed type of asset allocation." Nadler still believes that 10% of every investor's portfolio should be in gold, which is actually higher than most money managers recommend.

 

However, negative real interest rates seem here to stay in the short term, which will support high gold prices. Key interest rates are between zero and 0.25%, while the real inflation rate is somewhere around 3% to 5%, according to analysts, which means your purchasing power is only 95% to 97% on the dollar. If the dollar is literally worth less, than investors turn to gold as a safer place to preserve their wealth until interest rates become positive again.

 

A day after rallying more than 3%, silver prices settled up 31 cents to $23.04 per ounce. Copper closed up 3 cents to $3.75 per pound.

 

Gold mining stocks, a risky but sometimes more profitable way to invest in gold, rallied with the metal Wednesday. Barrick Gold (ABX) closed up 2.7% at $48.59, while Newmont Mining (NEM) gained 1.7% to $64.72. Goldcorp (GG) rose 2.5% to $45.18, and Eldorado Gold (EGO) added 2.2% to finish the day at $19.08.

 

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