Strong dollar beats up gold

Prices slip as the greenback rallies on Japan's latest attempt to devalue the yen.

By TheStreet Staff Oct 31, 2011 1:00PM

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

TheStreet

 

A stronger U.S. dollar dragged gold prices lower Monday, but many experts think gold's haven appeal remains intact.

 

Gold (-GC) for December delivery was losing $21.10 at $1,726.10 an ounce at the Comex division of the New York Mercantile Exchange. Gold had traded as high as $1,746.50 and as low as $1,705.50 an ounce, while the spot gold price was down $17.60, according to Kitco's gold index.

 

Silver (-SI) prices were shedding 90 cents at $34.40 an ounce, while the U.S. dollar index was jumping 1.3% at $76.08 in midday trading.

 

The U.S. dollar was popping against the yen after the Bank of Japan intervened in the currency market to contain the yen's rapid rise. The idea is for Japan to sell its currency, maybe as much as 10 trillion yen, according to some reports, in order to devalue the currency against the dollar and help companies repatriate cash at lower levels.

 

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The strong dollar was dragging gold down, while the metal rose almost 1.5% in yen terms. Typically, a stronger dollar makes gold more expensive to buy in other currencies. According to Kitco's gold index, almost 100% of gold's sell-off Monday can be attributed to the rising value of the dollar.

 

Currency interventions in the longer term, however, can highlight the stability of gold as a haven asset.

 

"Confidence in the world's major currencies should drop further accordingly, and gold should remain in strong demand as an alternative currency," Commerzbank said.

 

Joe Foster, a portfolio manager at Van Eck Gold Funds, also said that if the Federal Reserve launches another round of quantitative easing and if the dollar and gold keep moving inversely to each other, then gold prices could pop.

 

"A couple of the Fed governors have been talking about buying assets like mortgage-backed securities. . . . (We will see this) play out over the next six months hinging on the economy and unemployment levels," he said.

 

Bank of America/Merrill Lynch wrote in a recent note that if the Fed's unemployment forecast for 2014 is above 7%, then the Fed will keep monetary policy accommodative in the form of low interest rates well beyond the current target date of mid-2013.

 

"Scaled-down buying interest from the physical and retail investment sectors should continue to underpin gold and silver," said James Moore, a research analyst at FastMarkets.com, who acknowledges that volatility as well as the need to sell gold for cash to cover losses elsewhere might weigh on gold prices in the near term.

 

Gold had been seeing a flight to safety rising almost 8% last week as investors bought gold along with stocks and as they looked for protection against Europe's debt crisis regardless of any plan. According to the latest Commitment of Traders report for the week ending Oct. 25, traders increased their speculative net long positions by almost 7,000 contracts and total net long positions increased by 5,466 contracts.

 

"Investment flows have turned positive and are key in leading prices higher against a gold fertile backdrop," Barclays Capital wrote in a morning note. "We continue to expect gold prices to be cushioned amid the seasonally strong period for demand." Barclays fourth-quarter price target is $1,875 an ounce and $2,000 as a 2012 annual average. However, a significant dip below $1,700 might trigger a deeper sell-off.

 

Gold mining stocks were struggling Monday. Barrick Gold (ABX) was slipping 1.7% to $50, while Newmont Mining (NEM) was sinking 1.5% to $67.47 after a downgrade from CIBC World Markets. Goldcorp (GG) and Randgold Resources (GOLD) were trading lower at $49.06 and $110.90, respectively, with Goldcorp shedding 2% and Randgold down 1% at midday.

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