Gold rises as dollar cools, Fed stands pat

Prices rally on a weaker US currency despite the Fed's reluctance to pump more money into the system.

By TheStreet Staff Nov 2, 2011 10:07AM

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

 

Updated at 4:45 p.m. ET

 

Gold prices rallied Wednesday as the Federal Reserve wrapped up its two-day policy meeting, the U.S. dollar fell and haven buying kicked in.

 

Gold (-GC) for December delivery added $17.80 to settle at $1,729.60 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,745.60 and as low as $1,715.50 an ounce while the spot gold price was climbing $17.10, according to Kitco's gold index.

 

Silver (-SI) settled up $1.21 at $33.94 an ounce, while the U.S. dollar index was down 0.3% at $77.10.

 

Gold traders were breathing a sigh of relief Wednesday as the U.S. dollar cooled off, making the metal cheaper to buy in other currencies. The dollar index had rallied almost 3% since Friday, which had dragged down all assets, especially gold. Experts think the two should continue to move inversely to each other in the short term, creating more volatility.

 

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Gold was also unperturbed by the Federal Reserve's decision not to pump more money into the system. The Fed lowered its 2011 growth target to 1.6%-1.7% and 2012 estimate to 2.5%-2.9%. The Fed sees inflation rising to 2.9% in 2011 but then slipping back down to 2% by 2012, its informal target.

 

As many analysts had been expected, the Fed is talking about "enhancing the clarity of public communication," meaning that it is looking at tools to tie monetary policy to specific conditions -- for example, keeping rates at zero until the unemployment rate dips below a predetermined level as long as inflation remains below the Fed's target. Fed chairman, Ben Bernanke, said in his press conference that no decisions were made on this but that giving clarity is a big priority.

 

The Fed was much more upbeat about recent economic growth, saying that it strengthened rather than remained slow and that household spending has increased at a faster pace.

 

"The FOMC meeting seemed really upbeat and positive," says Phil Streible, senior market strategist for MF Global, which initially curbed some of gold's rally. But during Ben Bernanke's press conference gold started to climb. "People still believe in longer term fundamentals and used that small correction to add to positions." The Fed did say it still sees significant downside risks to the economic outlook.

 

Gold traders were hoping for, but not pinning their hopes on, more quantitative easing, which many experts think the Fed will be forced to do in mid-2012. Charles Evans, president of the Chicago Federal Reserve Bank, dissented from his peers and called for more stimulus to jump start the economy. But even absent more money, consistent low rates remain supportive for gold.

 

With rates at zero and overall inflation at 3.9%, real interest rates are a negative 3.9%, which means one dollar in the bank is now worth 96.1% versus 100% of its previous value. As cash loses value, investors opt for gold as place to store wealth until real interest rates can revert to positive territory.

 

Ross Norman, CEO of SharpsPixley, however, is more focused on Europe than the Fed. "U.S. news has been sidelined and the focus has been on Europe." Norman thinks the most critical mover for gold is still the U.S. dollar. "There seems to be a ping pong in terms of what is moving gold . . . normally (the Fed would) be a big mover, but investors are still really focused on Greece and the euro."

 

The euro was climbing modestly against the dollar, which was also helping gold, as doubts arose as to whether Greece's parliament will approve a referendum on the country's next bailout.

 

According to reports, Greek Prime Minister George Papandreou's cabinet supported the measure, but he might be one vote short of support in Parliament after one party member defected and three others threatened to vote against it.

 

A referendum would not only prevent a swift and decisive resolution to Greece's debt problem but could also throw the entire eurozone into turmoil. If Greeks vote against passing austerity measures and therefore do not receive more aid, the country won't be able to pay its bills, which would hurt countries and banks that own its debt. Greece would have to abandon the euro so it could print its own money.

 

Many traders are also skeptical of the metal's ability to launch a big rally. "My ultimate downside is $1,580 and below that $1,535 an ounce," says Anthony Neglia, president of Tower trading. "(My) upside is that $1,800 level that we missed last week. I would like to see it trade above that level before we can rekindle a good fourth-quarter bull trend."

 

Gold mining stocks rallied along with broader equities Wednesday. Barrick Gold (ABX) closed up 2.4% at $50.52, Newmont Mining (NEM) climbed 1.5% to $66.62, and Goldcorp (GG) shot up 3.4% to finish at $50.64.

 

Randgold Resources (GOLD) rallied 3.1% to close at $113.72 despite reporting earnings Wednesday morning with revenue and production that fell short of Reuters estimates. The company made $1.17 a share versus estimates of $1.42 on revenue of $309.6 million. Gold production was 182,362 ounces, light by just 2,000 ounces, but profits were up 335% year-over-year and 29% sequentially as several mines ramped up and the civil war in the Ivory Coast was resolved.

 

Randgold is still in a growth spurt but now has access to better gold, which will help its production rate and cash costs, which were $747 an ounce for the third quarter. The company had to lower 2011 production guidance recently after severe floods, and is currently on track to produce 740,000-760,000 ounces this year.
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