Gold edges up as dollar slips

Investors wait for Italy to sign austerity measures into law and for the resignation of Prime Minister Silvio Berlusconi.

By TheStreet Staff Nov 11, 2011 11:48AM

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

 

Gold prices were tiptoeing higher Friday as the dollar lost steam and investors awaited the resignation of Italian Prime Minister Silvio Berlusconi.

 

Gold (-GC) for December delivery was rising $14.50 to $1,774.10 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,777.50 and as low as $1,745, while the spot gold price was up $13.90, according to Kitco's gold index.

 

Silver (-SI) was adding 36 cents at $34.47 an ounce. The U.S. dollar index was down 0.2% at $77.46.

 

Gold was trying to recover from a steep 1.7% sell-off Thursday, which caught a lot of traders by surprise.

 

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Experts speculate that gold is still trying to shake off the effect of MF Global's bankruptcy. Traders whose positions are frozen and who don't have enough cash to move their trades to another firm might be forced to use options on gold to hedge their bets with puts -- betting against higher prices -- the favorite of late. As a result, the futures market could stay volatile until traders get control of all their cash.

 

David Banister, the chief investment strategist at TheMarketTrendForecast.com, says, "The $1,750s need to hold as support," and he still thinks that gold should rise to $1,840 an ounce.

 

Headed into the weekend, investors are waiting for Italy to approve its austerity measures into law, a development that would seal the fate of Prime Minister Silvio Berlusconi, who has said he plans to resign after the measures are passed. Markets were somewhat hopeful, with Italy's long-term borrowing costs falling to 6.66%.

 

If the markets breathe a sigh of relief, the euro could rally, the dollar could fall and gold could pop. If the crisis really abates, however, then gold might see a relief sell-off, says Adrian Ash, the head of research at BullionVault. Ash also thinks MF Global had a bigger impact on the gold futures market as it sucked the hot money out of gold, which would also explain why the metal has had a hard time making record highs despite panic over Greece and Italy.

 

Ash thinks gold investors are torn between inflation -- if the European Central Bank has to print money to save Europe -- and deflation -- as European banks are responsible for half of global credit supply. In 2008, when the collapse of Lehman Bros. caused a deflation panic, the gold price in dollar terms lost a third of its value but in the pound and euro it hit new records. Ash thinks something similar could happen this time around: "As the oxygen came out of the futures market . . . you had physical demand coming through . . . when the two met then gold rose very sharply."

 

On the flip side, Jon Nadler, a senior analyst at Kitco.com, thinks the U.S. dollar will remain the ultimate haven and the only currency left standing. "Here we have assets (gold and silver) that should be hand in hand rallying," he says, whereas gold and silver have decoupled of late, "and of course with the crisis being at its most intense phase one would expect them to be significantly higher than they both are."

 

Nadler thinks the U.S. dollar index will rise back to $80, which "will be somewhat depressive for the commodities complex."

 

Gold mining stocks were rallying along with broader equities Friday. Barrick Gold (ABX) was rising 2.9% to $52.60, while Randgold Resources (GOLD) was gaining 2.8% at $118.32. Goldcorp (GG) was climbing 3.3% to $53.09, and AngloGold Ashanti (AU) was soaring 3.7% to $48.99.

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