Gold settles lower after volatile day

By Alix Steel, TheStreet

 

Updated at 3:30 p.m. ET

 

In a volatile day of trading, gold prices made early gains Thursday, then dipped below $1,300 before finally recovering most of their losses, as better-than-expected data in the U.S. and sovereign debt worries in the eurozone pulled prices in opposite directions.

 

Gold for December delivery settled 70 cents lower at $1,309.60 an ounce at the Comex division of the New York Mercantile Exchange. Gold Thursday traded as high as $1,317.50 and as low as $1,297. The U.S. dollar index was gaining 0.1% to $78.75, while the euro was down slightly at $1.36 against the dollar. The spot gold price was down $1.30, according to Kitco's gold index.

 

Stocks had an up-and-down day as well. The Dow Jones Industrial Average ($INDU) had pared most of its losses by late afternoon and was falling 24 points to 10,812, while the S&P 500 ($INX) was up 1 point to 1145 and the Nasdaq ($COMPX) was up 1 point to 2,377.

 

Although the European Union is trying to contain sovereign debt issues, investors were still worried over a possible "Greece II" in Europe. Moody's downgraded Spain's debt rating to AA1, with a stable outlook, while protests raged in the country and elsewhere in Europe over proposed budget cuts and tax increases.

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Although Moody's downgrade was late compared with its peers, the news came on the heels of Ireland's announcement that its bailout of Anglo Irish Bank could come with a $46.3 billion price tag, leaving investors worried that Ireland might not have enough money to support its financial system.

 

Struggling European Union nations are in a bind as they try to meet budget deficit reductions without crimping economic growth. The European Central Bank is providing access to more short-term loans but is refusing to buy EU and government bonds, something Japan and the U.S. have done.

 

There is some speculation that the ECB will be forced to act and run its printing presses if inflation keeps dropping and growth keeps stagnating. The worries are similar to those that triggered a massive euro sell-off and gold rally last spring when Greece was at risk for default, which pushed gold prices past the psychologically important $1,200 level for the first time.

 

"Investor sentiment remains very positive towards gold with a raft of macro uncertainties driving interest," wrote Suki Cooper, a commodities research analyst at Barclays Capital. "Physically backed gold ETPs rose by 0.7 tonnes yesterday taking total metal held across the 22 products we track to a fresh peak at 2121.5 tonnes."

 

Gold prices have settled above $1,300 for two consecutive trading days, and the longer gold can hold that level, the stronger this new range becomes. David Morgan, the founder of Silver-Investor.com, looks for three successive closes before adjusting his price target.

 

The real test will come Friday when the fourth quarter begins and it's revealed whether traders want to hold on to their gold positions or if they were simply trying to make their portfolios look better to clients.

 

"The rebalancing effect as we get into the fourth quarter certainly could have some effect on the price," said Will Rhind, the head of U.S. operations for ETF Securities. Rhind believes, however, that gold's recent rally has more to do with U.S. dollar weakness than with technical trading.

 

The U.S. dollar has been selling off modestly in anticipation of more quantitative easing by the Federal Reserve. That in turn has made gold, a commodity sold in U.S. dollars, cheaper to buy in other currencies.

 

The CME Group announced the launch of an E-micro gold futures contract, which will begin selling Monday only on the CME Globex. According to the CME press release, the contract is one-tenth the size of a typical 100-ounce gold futures contract. Investors cannot take delivery of a 10-ounce gold bar, but they can take delivery of the micro contracts in the form of warrants and accumulate enough to receive ownership of an actual 100-ounce gold bar.

 

The new product will offer investors a cheaper way to buy gold and support growing investor demand, which surged 118% in the second quarter, according to reports by the World Gold Council.

 

George Gero, senior vice president and financial consultant for RBC Wealth Management, says the micro contracts won't have too much impact on the volatility of gold prices but will be good for "ETF and coin dealer hedges" as investors look for ways to trade the gold market.

 

Silver prices settled 13 cents lower at $21.82 per ounce while copper closed down 1 cent at $3.65 per pound.

 

Gold mining stocks, a risky but sometimes more profitable way to buy gold, were falling Thursday. Barrick Gold (ABX) was down 1.4% to $46.30 while Newmont Mining (NEM) was 2% lower at $62.65. Randgold Resources (GOLD) was dropping 1.3% to $101.46, and AngloGold Ashanti (AU) was losing 0.7% to $46.20.

 

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