Gold pares early losses

Prices rebounded from morning lows as the dollar began to weaken.

By TheStreet Staff Oct 18, 2010 11:10AM

thestreetBy Alix Steel, TheStreet

 

Updated at 4:08 p.m. ET

 

Gold prices, which had slipped early Monday as the U.S. dollar showed some life, bounced back this afternoon as bargain hunters stepped in to buy the metal.

 

Gold for December delivery settled 10 cents higher to $1,372.10 an ounce at the Comex division of the New York Mercantile Exchange. Gold today has traded as high as $1,373.60 and as low as $1,353.20.

 

The U.S. dollar index was falling 0.1% to $76.93, while the euro was up slightly to 1.40 against the dollar. The spot gold price was up $5.60, according to Kitco's gold index.

 

Stocks rallied after Citigroup (C) reported better-than expected third-quarter earnings. The Dow Jones Industrial Average ($INDU) rose 81 points, or 0.7%, to close at 11,144. The S&P 500 ($INX) gained 9 points, or 0.7%, to 1,185, and the Nasdaq $COMPX) added 12 points to finish at 2,481. 

 

Prices pared earlier losses as bargain hunters bought gold on this morning's minor selloff. Gold has rallied 22.4% year to date and 9% since September as investors have piled into the precious metal for protection against a steadily weakening U.S. dollar and volatile global currencies.

 

Recently, however, gold has been coming under some pressure as worries that the Federal Reserve might print less money and buy less government debt than previously expected triggered a rally in the U.S. dollar.

"The dollar looks set to provide further direction in the coming sessions as players speculate over the Fed's QE measures," said James Moore, an analyst at thebulliondesk.com. "However, gold should remain underpinned by dip-buying interest from the physical and investment sector."

 

The popular gold exchange-traded fund SPDR Gold Shares (GLD) added 14.59 tons just in the past week as gold hit a new intraday high of $1,388 an ounce. Many analysts, however, expect gold to remain in a holding pattern until there is more clarity on how big the next round of quantitative easing from the Fed will be.

 

"I think a lot of that is already priced into the market," argues David Morgan, founder of Silver-Investor.com. "So we're kind of at a standstill in my view. . . . When in doubt, stay out" of the market. Morgan is currently flat on his short-term gold trades. "If you have a big win . . . you might consider buying some puts to protect those gains."

 

One bullish factor waiting in the wings for gold prices was a statement by Kim Choong-soo, head of South Korea's central bank, that the country might be interested in adding to its gold reserves. The Financial Times reported that the country would consider accumulating more gold to diversify its portfolio, which is heavily weighted in U.S. dollars.

 

According to the World Gold Council, South Korea holds 14.4 tons of gold, which makes up only about 0.2% of its reserves. By comparison, the U.S. keeps 72.8% of its reserves in gold. South Korea would be the latest country adding to its gold reserves, a trend which has supported a higher gold price since early 2009.

 

"There has been a fundamental shift in the behavior of central banks," says Natalie Dempster, the head of investment for the World Gold Council. "Central banks on the whole have been net sellers of gold for the past two decades."

 

Since the second quarter of 2009, however, central banks from emerging-market countries have transitioned into net buyers. The Reserve Bank of India has been actively buying gold from the International Monetary Fund. India now holds 7.5% in gold reserves, which is still considerably lower than the 20% in gold reserves it held in 1994.

 

One of the biggest buyers is China. Over the past five years, the country secretly increased its gold holdings from 600 tons to 1,054 tons. China currently holds only 1.6% of its reserves in gold. Dempster says that if China were to reallocate its holdings to 3%, it would need to buy 1,000 tons of gold. China said in March that it would not be looking to add more gold to its portfolio, as it would affect the price too much, but the country is encouraging its citizens to buy gold.

 

"Some banks like India," Dempster says, "have been rebalancing as the percentage of gold in total reserves has fallen over time. Others are looking to diversify away from dollar-based assets, and with sovereign debt concerns continuing to grow around the world, gold's attractiveness as a reserve asset that bears no credit risk continues to grow."

 

Central banks, in general, regard reserve allocation as an ongoing government policy. Although the governments consider fundamentals like dollar weakness and the sustainability of gold as money, they don't trade gold; they buy it as an investment. They will buy gold when they feel gold reserves are too low when compared with their other holdings.

 

Silver prices settled up 13 cents at $24.41 per ounce, while copper added 2 cents to close at $3.86 per pound.

 

Gold mining stocks, a risky but sometimes more profitable way to buy gold, closed mostly lower Monday. Barrick Gold (ABX) fell 0.5% to $47.82, while Newmont Mining (NEM) gained 1% to finish at $62.49. Randgold Resources (GOLD) fell 1.4% to $102.39, and AngloGold Ashanti (AU) dropped 0.6% to close at $47.02.

 

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