Gold sputters as dollar dominates trading

Prices remain at the mercy of currency volatility, slipping slightly Wednesday as the greenback staged a late rally.

By TheStreet Staff Oct 19, 2011 10:57AM

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

 

Updated at 4:41 p.m. ET

 

Gold prices failed to claw their way higher Wednesday as the dollar firmed up and as inflation in the U.S. crept higher to 3.9%.

 

Gold (-GC) for December delivery settled down $5.80 at $1,647 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,666.90 and as low as $1,645.10 an ounce on light volume, while the spot gold price was down $10, according to Kitco's gold index.

 

Silver (-SI) slid 55 cents to finish at $31.28 an ounce, while the U.S. dollar index was down slightly at $77.12.

 

Gold is still at the mercy of currency volatility. The euro had gained some steam against the dollar after the U.K.'s Guardian newspaper reported that France and Germany had agreed in principle to expand the European Financial Stability Facility, in essence a bailout fund, to 2 trillion euros. The fund would not expand in cash -- taking money printing off the table -- but would use leverage to provide the first line of defense against any bond losses from struggling eurozone countries. But the dollar firmed up in afternoon trading, and that weighed on gold prices.

 

"Gold is trying to break away from that correlation (to the dollar)," says Will Rhind, head of U.S. operations for ETF Securities, "but is struggling . . . We are looking for gold to try to reassert itself from a safe harbor perspective."

 

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The dollar was pressured early Wednesday as inflation in the U.S. rose to 3.9% in September, which means that real interest rates are almost a negative 4%. Gold typically does well when real rates -- the interest rate minus the inflation rate -- are negative, as the dollar loses value, making gold more attractive as a store of wealth. Overall, however, it seems like investors are turning to the dollar as the haven asset of choice.

 

"Bargain hunting and minute-by-minute changes in headline news are causing see-sawing markets," says George Gero, senior vice president at RBC Capital Markets. That fate is unlikely to change anytime soon as Eurozone leaders prepare to meet October 23rd with a lot of pressure on them to "fix" Greece, banks and bondholders.

 

"We are looking for a bit of a catalyst," says Rhind. "People who are not in gold who are looking to get into the gold market right now are . . . sitting on the sidelines. But I think the investors that are in gold or that have been in gold aren't really fazed by it."

 

ETF Securities has a slew of physically-backed products and Will says there has been no major shift in inflows or outflows in recent weeks. "The sentiment right now is people are waiting to see what happens and are repositioning themselves from a portfolio perspective . . . (around) any other news over the next few weeks."

 

Ross Norman, CEO of Sharps Pixley, on the other hand, is worried gold might see another leg down. September's selloff left investors "spooked by the state and manner of the decline and they are slow coming back in again."

 

With tensions high in Europe and the U.S., gold is acting in a very uncharacteristic way, having lost its haven appeal. "To some extent it’s making some investors sit on their hands . . . the longer this goes on for, the more you might see more long liquidation on the Comex."

 

The Comex, where commodity futures are traded in the U.S., has its own set of problems. The Commodity Futures Trading Commission voted to limit positions to 25% of deliverable supply. Norman doesn't think this will do anything do the gold price, but it will move business overseas to Asia. Asia is ready.

 

The Shanghai Gold Exchange already exists, but now investors can trade yuan-denominated gold contracts at the Pan Asia Gold Exchange, or PAGE, which should be in full trading swing by the end of the year.

 

Gold is being supported by physical buying, but really needs investor demand to continue its uptrend. Norman thinks PAGE might be just the thing. "It could rejuvenate the gold price," he says, adding that there is a big "speculative community in Asia."

 

Gold mining stocks were getting hammered Wednesday. Kinross Gold (KGC) was tanking 7.1% at $13.55, Yamana Gold (AUY) was dropping 5.4% to $14.25, and Barrick Gold (ABX) was tumbling 4.9% to $44.80.

Agnico Eagle (AEM), in particular, was getting killed, falling more than 18% to $46.51, after the company was forced to shut down its Goldex mine in Quebec while it investigates and addresses water inflow and ground stability problems. Agnico will be forced to write off its investment in the mine of $260 million, amounting to $1 a share after tax.

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