Gold shrugs off Paulson's exit

By Alix Steel, TheStreet

Gold prices were climbing higher Tuesday reversing earlier losses as investors battled between buying gold as a safe haven and dumping it for cash.

Gold (-GC) for December delivery was up $3.70 at $1,782.10 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,787.80 and as low as $1,760.90 an ounce while the spot price was losing 70 cents, according to Kitco's gold index.

Silver (-SI) prices were adding 55 cents at $34.58 an ounce while the U.S. dollar index was up 0.5% at $77.93.

Gold investors were digesting the news that famed hedge fund manager John Paulson dumped 11 million shares of the SPDR Gold Shares (GLD) in the third quarter. Many experts have been worried of mass liquidation by Paulson and what it would do to investor psychology in the gold market.

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The GLD currently holds 1,268 tons, which is relatively unchanged since the start of the second quarter. When investors sell -- and if there are no buyers to take their place -- then the GLD must sell some of its gold. If there is rampant demand, then the ETF has to buy bullion. Occasionally the fund must sell some gold to pay for expenses, but the fact that tonnage is relatively unchanged means that there have been enough buyers regardless of Paulson's offload.

Scott Redler, chief strategic officer for T3Live.com, says that Paulson's sale means that he is "out of the way . . . now gold is acting much better." Futures trader Anthony Neglia, president of Tower Trading, says that any Paulson sale was already factored into the market. "I think that it's already known (that he would sell)" and that it doesn't come as a huge surprise. The gold price is currently holding and Neglia said it was bullish that there was "no downward pressure to the gold price."

Gold prices had been down as much as $18 in early trading but clawed higher after November's empire manufacturing data came in stronger than expected -- signaling growth not contraction -- and prices producers pay for goods fell by 0.3%.

The data prompted more of a "risk on" trade, which meant investors had less need for the safety of the dollar and started buying other assets, including gold. Any meaningful price dip in gold has also been met with strong buying.

The move seems counterintuitive for gold, but the metal's moves have lately been more inversely correlated to the U.S. dollar rather than any fundamental.

"Gold is still a safe haven," says Jeff Clark, Casey Research's senior precious metals analyst, "but it is a tradable asset and people buy gold for different reasons," from inflation, deflation, debt worries and panic to economic calamity. On any given day one of these factors becomes more prevalent, argues Clark.

Clark believes that gold needs time to breathe. "The run up that we had from August and September was dramatic enough that it's not surprising that it will take some time for the gold price to consolidate before it makes new highs," which he thinks might happen next year.

Longer term, Clark is still bullish on gold. He says that currently 10% of Federal revenue now goes to debt, but according to the Congressional Budget Office that number could triple. "That is a dramatic amount and that is going to have an impact on the purchasing power of the dollar and that is the kind of environment that one wants to hold gold in."

If Europe triggers a global slowdown, Clark says a portion of investors would "ditch out" of gold and that gold won't rise in a deflationary environment but it won't collapse either. "The greater the deflationary reaction in the markets, the greater the inflationary reaction by the Federal Reserve and other central banks," which means more currency debasement.

Gold mining stocks were mixed Tuesday. Barrick Gold (ABX) was down 0.2% to $52.13 and Newmont Mining (NEM) was losing 0.2% at $69.32. Goldcorp (GG) was sliding 0.3% to $52.81 while Randgold Resources (GOLD) was rallying 1.7% to $119.08.