Gold prices struggle against a stronger dollar

Fearing Italy could default on its debt, investors rush into haven assets, forcing gold to compete with a soaring US currency.

By TheStreet Staff Nov 9, 2011 2:16PM

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


Gold prices were sliding Wednesday as stocks tanked and investors rushed into cash and gold in a search for safety.


Gold (-GC) for December delivery was down $9.90 at $1,789.30 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,801.10 and as low as $1,778.80 an ounce while the spot price was up $4.80, according to Kitco's gold index.


Silver (-SI) prices were losing 71 cents at $34.45 an ounce while the U.S. dollar index was soaring 1.4% at $77.70.


The hangover of Italian Prime Minister Silvio Berlusconi's resignation was setting in as questions popped up as to when Italy's Parliament would vote on converting the $63 billion austerity package into law, what kind of government would be formed and when Italy would hold new elections.


LCH Clearnet also raised the amount of money it costs to trade Italian bonds by as much as 5%. The euro was losing ground against the dollar and gold was caught between a much stronger dollar and rampant haven buying.


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Gold investors were also digesting the latest inflation reading out of China -- price increases slowed to 5.5% in October. The lower number gives the central bank more flexibility with monetary policy as the need to curb prices isn't as strong, but on the surface falling prices could be negative for gold. Many experts think prices will stay volatile in the medium term.


David Christensen, CEO of ASA Gold and Precious Metals (ASA) says that "volatility is so high that round numbers tend to provide hurdles," meaning that the $1,800-an-ounce price point will be hard for gold to overcome. Christensen thinks gold could fall as low as $1,400 but rally as high as $2,500 an ounce.


To really push gold higher, Christensen is looking for a disaster out of the eurozone, like a country leaving the euro or a steep decline in Italy's sovereign debt rating. "Problems are growing faster than the solution . . . the trend is positive" for gold.


"If anything, the fundamentals for gold have been strengthened by everything that has been happening," says Martin Murenbeeld, chief economist at DundeeWealth. "The game is coming down more and more to the European Central Bank stepping in to stop interest rates (rising) in Italy."


ECB president Mario Draghi has said that it will only buy government bonds on an interim basis and not as a long-term backstop, but the private sector isn't stepping up leaving many to think the ECB will be the lender of last resort.


Gold's fate is now dependent on how bad things get in Europe. If Europe plunges into a recession and disaster strikes, Murenbeeld thinks that gold prices will fall along with every other asset. "To what degree we are going to create more liquidity -- when that thought is in more ascendancy -- gold will start to rise."


If Italy is able to calm the markets with a governmental proposal, stable elections or by passing austerity measures, then gold might back off a bit as the need for money printing will be less in the foreground. "But medium term they aren't going to get out of their problems," says Murenbeeld. "We have a high probability of the Euro system breaking up. In a year you are not looking at the same euro system we have now. Some countries would be out at a minimum."


One largely ignored bullish fact for gold was that the China Gold Association said demand for gold could climb to 400 tons this year, a 50% year on year rise. Demand for gold bars could double to 270 tons. Christensen says the country imported 57 tons of gold in September and that the country has already exceeded imports this year compared to all of 2010. Christensen says that demand for gold bars signals big institutional demand or central bank purchases.


Gold mining stocks were mixed Wednesday while broader equities tanked. Barrick Gold (ABX) was rallying 1.5% to $52.84 while Newmont Mining (NEM) was shedding 0.6% at $71.21. Goldcorp (GG) was gaining 1.5% to $53.75, and Randgold Resources (GOLD) was surging 1.7% to $120.55, close to its 52-week high. 


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