Gold continues to slide as dollar strengthens

Prices sink for a second straight day as investors rush into cash.

By TheStreet Staff Nov 1, 2011 1:07PM

Image: Gold (© Anthony Bradshaw/Photographer)By Alix Steel, TheStreetTheStreet


Gold prices were sinking for a second consecutive session as the U.S. dollar soared and stock markets tanked on renewed fears that Greece will default on its debt.


Gold (-GC) for December delivery was losing $20.70 at $1,704.50 an ounce at the Comex division of the New York Mercantile Exchange Tuesday. Gold has traded as high as $1,725.60 and as low as $1,681.20 an ounce, while the spot gold price was down $15.70, according to Kitco's gold index.


Silver (-SI) was shedding $1.41 at $32.94 an ounce while the U.S. dollar index was jumping 1.1% at $77.31.


"Investors (were) again hit with multiple negative headlines," says George Gero, senior vice president at RBC Capital Markets. Gero said funds were using the headlines as a trigger to sell.


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Although the impact of MFGlobal's (MF) bankruptcy was of little impact to traders at the NYMEX, some said that those affected would be forced to raise cash elsewhere while they waited for their money from the firm, which could force selling and pressure prices.


Greece has also buried itself deeper in its debt debacle, as Prime Minister George Papandreou announced a public referendum on the second 130 billion euro bailout. The vote won't be held until January, which just clouds markets with more uncertainty.


Gold could benefit from haven buying or panic buying due to the renewed uncertainty, but liquidation seemed to rule the day as traders were forced to sell the metal, up 3.6% in October, to cover losses elsewhere. "It just depends on what their threshold for pain is," says Anthony Neglia, founder of Tower Trading.


Neglia also names U.S. dollar strength as the big culprit in gold's selloff. "Gold is traded in many other currencies . . . and the lower these currencies go, the more expensive it is to hold gold, so the less attractive it becomes. So unless we get a significant decline in the dollar, i.e., a rally in other currencies, I think gold is probably trapped for now."


"I sense that the next several days could see more weakness," agrees Adrian Day, president of Adrian Day Asset Management. "I think all we are seeing right now on a short term basis . . . (is that some investors) had another chance to sell."


Many experts, including Day, are now looking toward the Federal Reserve's two-day FOMC meeting for direction. Although rates are expected to stay at or near zero until mid-2013, any change in language or a further extension of low rates would underscore a more accommodative monetary policy.


Some Fed members have also been more vocal recently about supporting the economy, hinting at more asset purchases. New York Fed President William Dudley said last week that the Fed will do "everything within its power" to spur job creation. Fed vice chairman Janet Yellen also said that the Fed could consider buying a broader range of securities to ignite growth.


Bank of America/Merrill Lynch wrote in a recent note that there is an increased likelihood of Fed mortgage backed security purchases and expects the Fed to announce more stimulus next summer. Bank of America also says the Fed could tweak its language to extend the time frame for low rates.


"One straightforward possibility would be to modify the phrase in the FOMC statement . . . to say 'exceptionally low levels for the federal funds rate at least through 2013.'" The firm thinks rates will stay low until the third quarter of 2014.


When real interest rates -- the interest rate minus the inflation rate -- are negative, gold becomes an attractive asset to own, as cash in the bank is literally worth less.


"The most important thing for gold is any indication from the Fed suggesting that quantitative easing three is imminent," says Day. He isn't expecting any huge policy change at the FOMC meeting and doesn't think the market is either, which means any stimulus surprise would be a positive catalyst. On the flip side, if the Fed delivers no surprises then the lack of news is already accounted for in the lower gold price.


"The fundamentals are still very positive for gold . . . but I think that gold is constantly wanting a new impetus." Day thinks gold prices will fluctuate for a couple of weeks but that gold is more likely to see a positive impetus rather than a negative one. Day says many of his clients are calling to buy gold when the price is right and that gold dealers he talks with are getting more people wanting to know when the right time is to buy gold, which tells Day there is money on the sidelines waiting to get in.


Gold mining stocks were getting banged around Monday. Barrick Gold (ABX) was falling 2.3% to $48.37 while Newmont Mining (NEM) was also sinking 2.4% to $65.23. Goldcorp (GG) was off by 2% at $47.85, while Randgold Resources (GOLD) was falling 1.9% to $107.50.




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