Gold plunges as the dollar gains

Renewed confidence in the US currency and a surprise rate increase in China sent gold prices tumbling.

By TheStreet Staff Oct 19, 2010 10:20AM

thestreetBy Alix Steel, TheStreet


Updated at 4:39 p.m. ET


Gold prices tumbled 2.6% Tuesday on renewed confidence in the U.S. dollar.


Gold for December delivery shed $36.10 to settle at $1,336.20 an ounce at the Comex division of the New York Mercantile Exchange. Gold Tuesday traded as high as $1,371.70 and as low as $1,332.50.


The U.S. dollar index was adding 1.7% to $78.21, while the euro was down 1.3% to $1.37 against the dollar. The spot gold price was plunging $36.90, according to Kitco's gold index.


Stocks had a bad day as well, with the Dow Jones Industrial Average ($INDU) losing 165 points, or 1.5%, to close at 10,979. The S&P 500 ($INX) fell 19 points, or 1.6%, to 1,166, and the Nasdaq ($COMPX) shed 44 points, or 1.8%, to 2,437.


Gold prices were under pressure as U.S officials hinted that the dollar's appreciation would be orderly and cause minimal fluctuations in the currency market.

The U.S. garnered some criticism from the World Bank, which said monetary easing in the U.S. is driving up the value of emerging-market currencies and hampering their ability to compete in the export market. Thailand, Brazil and Japan have all been taking steps to control the rapid appreciation of their currencies.


U.S. officials, led by Treasury Secretary Tim Geithner, have promised that the government will not allow the dollar to decline in value for selfish export gain to jump-start the struggling economy. His comment came ahead of the Group of 20 meeting this weekend in South Korea, where finance leaders will no doubt discuss the emerging currency wars.


While the U.S. is taking heat for its falling currency, China is also being pressured to let its currency rise in value. The yuan has risen only 2% since June, when the country said it would let its currency appreciate in value.


The currency debate has taken center stage as the Federal Reserve has all but given the green light to more monetary easing. The worry previously was that the Fed would raise its long-term inflation target, which would mean more money printing over a longer period. However, now expectations have been somewhat dampened and gold prices have come under pressure.


"I think that plan is going to be a little bit smaller than expected or it's going to be spread out over different Fed meetings where the Fed is going to target specific quantities of Treasuries," said Phil Streible, a senior market strategist at Lind-Waldock. "Now that the facts are starting to spill out we're starting to sell off and lose some steam."


Investors had been buying gold as protection against future inflation. As each dollar is worth less, gold becomes the safest way to preserve wealth. Now that the inflation fear is tempered, investors have been selling some of their gold positions. Technical trading and short-covering on the dollar have also dominated precious-metals trading, and this inverse correlation is expected to continue in the short term.


"I think the dollar is a very undervalued asset," Streible said. "I think ultimate weakness (for gold) is around $1,327."


Gold was also coming under pressure Tuesday after the People's Bank of China raised its key benchmark interest rate by 25 basis points. It is another step by China to take money out of circulation to control inflation. Less money means less purchasing power, which could hurt gold demand in one of the leading consumer countries.


Many traders are staying in a wait-and-see mode when it comes to gold. Modest bargain-hunting has been supporting higher prices, but $1,400 is still a long way off. Streible says gold needs a string of bad news like surprisingly weak initial jobless claims to push prices to $1,400 in the short term. Tuesday's double-digit sell-off could also be triggering stop-loss orders, in which traders are forced to sell their gold positions once the price reaches certain levels to lock in gains.


Silver prices were sank 63 cents to settle at $23.78 per ounce, while copper closed 10 cents lower at $3.76 per pound. Silver and copper were also getting hit by China's rate increase. The country has been credited with leading the global economic recovery, and its latest attempt to cool growth has investors worried that China might slow too quickly. Concerns over future lack of demand for industrial metals were weighing on prices.


Gold mining stocks, a risky but sometimes more profitable way to buy gold, tanked along with the metal and broader equities. Barrick Gold (ABX) closed down 4.9% at $45.46, and Newmont Mining (NEM) fell 4.1% to $59.93. Randgold Resources (GOLD) sank 5.9% to $96.35, and AngloGold Ashanti (AU) lost 3.8% to finish at $45.25.


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