Gold settles lower on stronger dollar
A stronger US currency weighed on prices even after the Fed chairman said inflation levels are too low.
By Alix Steel, TheStreet
Updated at 4:31 p.m. ET
Gold prices settled lower Friday as a stronger U.S. dollar overshadowed Federal Reserve Chairman Ben Bernanke's statement that inflation levels are too low. Investors vacillated between buying gold as protection and selling the metal to lock in profits during a volatile session.
Gold for December delivery settled down $5.60 to $1,372 an ounce at the Comex division of the New York Mercantile Exchange. Gold Friday traded as high as $1,386.40 and as low as $1,362.70.
The U.S. dollar index was adding 0.5% to $77.07, while the euro was falling 0.8% to $1.40 vs. the dollar. The spot gold price Friday was tumbling more than $14, according to Kitco's gold index.
Financial stocks dragged the Dow Jones Industrial Average ($INDU) down 32 points, or 0.3%, to 11,063, while Google's (GOOG) 10% gain helped push the Nasdaq ($COMPX) up 33 points, or 1.4%, to 2,469. The S&P 500 Index ($INX) finished 2 points higher at 1,176.
Gold prices got an initial boost after a speech Friday morning from Federal Reserve Chairman Ben Bernanke, who, while not putting a dollar amount on more monetary easing, said inflation "can be too low" and that "overall economic growth is less vigorous than we would like," which most analysts took as a green light for more accommodative measures from the central bank.
Adding fuel to Bernanke's argument was the fact that the core Consumer Price Index for September was unchanged. Bernanke said that the Fed's next steps will be dictated by economic data and that a lack of inflation in September will certainly support the thesis that more money printing is needed.
Bernanke did say that the Fed will proceed with caution, leaving some question about how much money the Fed will print. Bernanke also said the economy should grow more quickly in 2011, which also raised the question as to how long the Fed's monetary easing will last.
Bernanke said the Fed is already outlining an exit strategy to cap quantitative easing and to make sure inflation doesn't surge out of control.
Gold's rally was crimped somewhat Friday as sellers emerged and investors opted for stocks over gold on rising retail sales and the New York State Manufacturing Index. Traders might also be looking to book gains after gold's rally this week and on the heels of options expiration.
However, most analysts predict gold prices should head higher in the short term amid the backdrop of monetary easing. George Gero, senior vice president and financial consultant of RBC Capital Markets Global Futures, said, "Buyers appear from everywhere at the first sign of profit-taking as currency weaknesses are hedged to maintain purchasing power."
With gold prices eying $1,400 an ounce, the question remains: Just how high can the metal go?
Henry Smyth, a portfolio manager of Granville Cooper, thinks that's the wrong question and the real question is "What is going to stop it?" Smith thinks the only thing that can hamper gold's rally is the return of positive real interest rates.
The real interest rate is the interest rate minus the inflation rate. Currently, rates are negative if you factor in key interest rates at zero and a 1.1% inflation rate, which most experts actually say is probably higher. If rates are negative, then the dollar is worth less. When the dollar is worth less, gold is worth more as a more stable form of currency.
Smyth sees "no steps to reverse the long-term decline of the dollar" and with money printing a foregone conclusion now there doesn't seem to be anything fundamental to crimp gold's rise.
Silver has also been benefiting from the flood into hard assets. After rallying 3% a day earlier, prices Friday slipped 15 cents to settle at $24.29, while copper added 2 cents to close at $3.84.
Gold mining stocks, a risky but sometimes more profitable way to buy gold, closed lower. Barrick Gold (ABX) finished down 1.5% at $47.99, while Newmont Mining (NEM) fell 1.1% to $61.88. Randgold Resources (GOLD) lost 1.2% to close at $103.85, and AngloGold Ashanti (AU) dropped 0.3% to $47.29.
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