Gold rebounds on eurozone fears

Prices bounce back somewhat from Wednesday's losses as fears that Ireland could default on its debt send investors looking for safety. But a stronger dollar is tempering the metal's rally.

By TheStreet Staff Nov 11, 2010 11:00AM

thestreetGold © Comstock Images/JupiterimagesBy Alix Steel, TheStreet

 

Updated at 3:44 p.m. ET

 

Gold prices made a modest rebound Thursday as the metal shined as a haven hedge against eurozone debt fears. Those same concerns helped boost the value of the U.S. dollar, though, tempering gold's gains.

 

Gold for December delivery added $4 to settle at $1,403.30 an ounce at the Comex division of the New York Mercantile Exchange. Gold Thursday traded as high as $1,417.60 and as low as $1,396.50.

 

The U.S dollar index was adding 0.7% to $78.14 as the euro dipped 0.9% to $1.37 vs. the dollar. The spot gold price was adding $3.80, according to Kitco's gold index.


The eurozone is in trouble again, and investors are turning to gold for the antidote. Ireland is leading the fear charge this time, with the yield on its 10-year note rising to 8.90%. Germany's, by comparison, in the safest European Union economy, has a 2.45% yield.

Investors are unwilling to lend money to Ireland for fear that the country may have to default on its debt, restructure its debt or tap the European Union/International Monetary Fund bailout reserve. There are also fears that new austerity measures, which Ireland needs to pass in early December, might put too much stress on its economy.

 

The spotlight on Ireland also spilled over to Greece, Spain and Portugal. Greece can barely tap international debt markets and is struggling to meet its deficit-reduction targets because of weak revenue. Massive unemployment has offset higher taxes and is preventing the government from making enough money.

 

The yields on the 10-year bond for Spain and Portugal were 4.5% and 7.23%, respectively, which puts those counties on the chopping block as well.

 

The eurozone drama was just what gold prices needed to move higher. "Investors will come in and buy physical gold when they get concerned (about defaults) or moving in the direction of defaulting on debt," says Nicholas Brooks, the head of research and investment strategy for ETF Securities.

 

Brooks brushes off steep corrections and thinks prices will keep moving higher. "Many investors have not actually participated in this rally . . . and have actually been waiting for a long time now for the big corrections so they can get in. . . . (So) any correction will be relatively short-lived."

 

Wednesday's correction fit the bill. The gold price on the Comex took a double-digit hit Wednesday as traders digested new margin requirements for silver, namely how much money they have to deposit upfront to buy a silver contract.

 

Gold was clawing its way to new record highs Thursday as investors turned to the hard asset at "discount prices" instead of paper currencies. The U.S. dollar was rallying on euro weakness, but it wasn't enough to snuff out a gold rally.

 

The currency debate at the G-20 meeting in South Korea so far has not yielded any big surprises. All the countries agree on promoting global growth but not on specifics of any exchange rate currency regulation. Brooks says that the outcome doesn't matter but that any currency debate is good for gold.

 

Despite all the recent gold hype, the physically backed gold exchange-traded fund SPDR Gold Shares (GLD) has shed only 2.43 tons since Monday. Investors don't seem to be committing new money to the ETF but aren't selling their long positions either.

 

Gold was also getting a boost Thursday on a disappointing revenue outlook from Cisco (CSCO) which spooked investors out of stocks and into the precious metal.

 

A higher-than-expected inflation reading out of China was also helping metal prices. The core consumer price index for October was 4.4%, compared with the anticipated 4%. China has taken steps recently to cool inflation expectations by increasing the amount of money banks must hold in their reserves, but with minimal results. Investors like gold during times of inflation as a more stable form of money.

 

Silver prices also recovered some of Wednesday’s large losses, adding 54 cents to settle at $27.41, while copper gained 5 cents to close at $4.03.

 

Gold mining stocks, a risky but sometimes profitable way to buy gold, were mixed Thursday.

 

Barrick Gold (ABX) was down 0.4% to $51.60, while Newmont Mining (NEM) was adding 0.6% at $62.69. Randgold Resources (GOLD) was gaining 0.8% to $100.19, and AngloGold Ashanti (AU) was falling 1.2% to $50.58.

 

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3Comments
Nov 11, 2010 4:48PM
avatar
This feels like the first time that gold and  silver have de-coupled from the stock market based on the dollar valuation  both up and down. I think this bodes very well for gold. And maybe not so well for the DOW.
Nov 11, 2010 1:55PM
avatar

Gold up,
Stocks Down,

 

Obviously people trust a peice of shiny yellow metal that can't think and is only good for jewelry, more than they trust the ivy league educated people on Wall St.

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