Gold pulls back after monster rally

By Alix Steel

Gold prices settled lower Thursday in the wake of Wednesday's 1.8% rally.

Gold (-GC) for February delivery settled down $10.50 at $1,739.80 an ounce at the Comex division of the New York Mercantile Exchange on Thursday afternoon. Gold traded as high as $1,758 and as low as $1,737.20 an ounce while the spot price was down $5.10, according to Kitco's gold index.

Silver (-SI) prices finished 5 cents lower at $32.76 an ounce, while the U.S. dollar index was down 0.2% at $78.25.

Gold investors were digesting Wednesday's fast and furious rally, which was prompted by central bank actions to make more dollars available at cheaper prices for longer periods of time. The news hammered the dollar and helped boost gold and equities.

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The U.S. dollar was steadying Thursday, putting mild pressure on gold. James Moore, research analyst at FastMarkets.com, says the absence of strong gold buying this morning shows that investors are still cautious about the imploding eurozone debt crisis and that perhaps gold prices might see further downside. "Given the proximity to year-end and absence of robust data, the sector will remain vulnerable to further bouts of long liquidation."

China's manufacturing activity index slipped below the 50 mark, indicating contraction, which could wind up supporting higher gold prices. The number came in less than HSBC's dismal prediction for November, but still might force the central bank to embark on a monetary easing cycle.

The People's Bank of China took the first step Wednesday by cutting reserve requirements for banks by 0.5%, and many experts think China will continue to cut and then tackle interest rates, which are currently at 3.5%.

More cheap money in the system tends to be good for gold prices as investors, particularly those in emerging market countries who might not have access to other investment tools, buy gold as a store of wealth.

Gold prices rallied almost 3% in December 2010 as portfolio managers and hedge funds gobbled up the metal to show clients that they owned some of the top-performing asset. Although recent strong prices might trigger some of that buying, physical demand is lackluster and might crimp that kind of peer pressure inflow.

Nigel Moffatt, head of Treasury at Gold Corporation, which operates the Perth Mint, says "demand is sluggish in the big league." Moffatt says Indian demand is almost nil, while China will buy gold but only at low premiums and interest elsewhere in Asia is sporadic at best.

"Coin demand is holding up though," says Moffatt, "with the U.S. showing good demand. This indicates that the attractiveness of gold for wealth preservation is being recognized down at the 'mom and dad' level." Without substantial buying, momentum traders and fund managers might be reluctant to chase the metal at high prices.

Tim Harvey, senior VP at ETF Securities, says that physical demand will pick up on price dips but that the big orders are already in. "If you were buying for Christmas you put your order in . . . months ago and all these festivals that we rely on in late third quarter and early fourth quarter to boost gold are winding down now."

Gold mining stocks were also taking a breather Thursday. Barrick Gold (ABX) was shedding 0.7% at $52.51 while Newmont Mining (NEM) was down 0.3% to $68.66. Goldcorp (GG) was down 0.9% to $53.23, and NovaGold (NG) was pulling back 3.2% to $11.13.