Gold hits new high, then pulls back

A deal to extend the Bush-era tax cuts and unemployment benefits fuels fears about the growing national deficit.

By TheStreet Staff Dec 7, 2010 12:51PM

the streetGold © Comstock Images/JupiterimagesBy Andrea Tse, TheStreet


Updated at 2:37 p.m. ET


Gold prices soared to new highs early Tuesday after President Barack Obama's agreement to extend the Bush-era tax cuts triggered worries about the nation's deficit problems. But by early afternoon, prices retreated as investors cashed in on gold's record-high prices and opted for stocks.


Gold for February delivery settled $7.10 lower at $1,409 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,432.50 -- an all-time record -- and as low as $1,403 Tuesday.


Stocks were rallying on the news of the tax-cut extension. The S&P 500 ($INX) was up 10 points, or 0.85%, to 1,233 after hitting a two-year high of 1,235.05. The Dow Jones Industrial Average ($INDU) was up 69 points, or 0.6%, at 11,431, and the Nasdaq ($COMPX) was rising by 25 points, or 1%, to 2,620.


President Obama agreed to congressional Republicans' wish to extend tax cuts implemented by the Bush administration for all income groups for two years. Those in favor of the tax cuts said canceling them would hurt the economy by discouraging consumer spending.

The deal trims worker payroll taxes for one year, extends credits for small businesses and extends unemployment benefits.


"It remains to be seen whether these cuts will have the desired impact of stimulating the economy, but they most certainly will grow the deficit and weaken the dollar, and this is perhaps what is behind the sizable advance we (saw) today," MF Global metals analyst Edward Meir said of the tax cuts in a morning note.


After the morning rally, prices swooned as investors sold their positions to book profits or jump into stocks. Many analysts expect any price dip, however, to be met with buying as traders look to buy gold at a "discount."


"Every time we've seen a decline in prices, we've seen investors step in and use that as a buying opportunity," argues Rohit Savant, senior commodity analyst at CPM Group.


"We can see prices dip to maybe $1,380-$1,360 on the downside and on the upside we will probably see prices rise maybe even towards $1,450," Savant said.


Contributing to gold's decline was speculation that China might raise key interest rates as early as this weekend. The move has been widely anticipated after the country reported a 4.4% rise in its core Consumer Price Index vs. a year ago.


The country has been taking steps to slow its growth by raising the amount of money banks must hold in their reserves but they haven't been enough to cool growth. The worry is that a slowdown in China would severely crimp the country's demand for commodities especially gold.


China imported 209.7 metric tons in the first 10 months of 2010, which is 7.4 million ounces. The figure beats the gold ETF, SPDR Gold Shares (GLD), which only added 164.36 tons or 5.8 million ounces in the same time period. Any substantial slowdown in purchasing power and gold demand would severely weigh on prices.


The U.S. dollar index was gaining 0.2% at $79.74, and the euro was rising slightly to $1.33 vs. the dollar. The spot gold price was falling by more than $13, according to Kitco's gold index.


The euro was gaining strength as the markets anticipated a 2011 austerity plan to be passed in Ireland, helping to ease some concern about the eurozone debt crisis.


Silver prices settled up 4 cents at $29.78 after reaching a 30-year high earlier. According to BullionVault's head of research, Adrian Ash, investors are increasingly going beyond gold to help diversify their portfolios.


Savant says that silver's safe-haven appeal is helping support high prices but that its fabrication uses are propelling their momentum. "[Silver is used in] electronics and solar panels so you have this dual role that silver plays on the fabrication as well as the investment side." Savant says it would be normal for silver to correct on profit-taking but that in January the metal will be set to make new 30-year highs.


Copper gained 4 cents to close at $4.05. News that JPMorgan (JPM) bought more than $1 billion of copper helped the base metal rise as traders worried about supply issues and market domination by the investment bank and its clients.


Gold mining stocks, a risky but potentially profitable way to buy gold, were mostly lower.


SPDR Gold Trust (GLD) was falling 1% to $137.66 and Barrick Gold (ABX) was down 0.4% to $54.61. Newmont Mining (NEM) was up slightly to $63.47, while Goldcorp (GG) was shedding 0.9% at $47.41.


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