Gold slips as traders cash in on gains

Prices took a hit as investors locked in profits after a weeklong rally.

By TheStreet Staff Feb 25, 2011 11:38AM

Gold © Comstock Images/Jupiterimagesthe streetBy Alix Steel, TheStreet

 

Updated at 4:14 p.m. ET

 

Gold and silver prices struggled Friday as wary investors sold their positions ahead of the weekend and as a modest rally in stocks stymied the metals' weeklong rally.

 

Gold for April delivery slipped $6.50 to settle at $1,409.30 an ounce at the Comex division of the New York Mercantile Exchange. The gold price began to slide Thursday after the market closed as oil fell below $98 a barrel. Gold traded as high as $1,412.40 and as low as $1,400.10.

 

The spot gold price was up $6.30, according to Kitco's gold index. The divergence between spot gold prices and the futures market indicates that demand for the physical metal is strong while technical trading isn't. Heading into the weekend, with uncertainty in Libya over the fate of leader Moammar Gadhafi, traders may be reluctant to put new money to work, instead booking profits to cover potential losses in other areas.

 

Stocks, meanwhile, bounced back from their painful week as oil prices flat-lined below $100 a barrel. Reports that Saudi Arabia would release more oil if there was a substantial drop in Libyan exports calmed investors and subdued the frantic rush into haven assets.

 

The Dow Jones Industrial Average ($INDU) finished up 62 points, or 0.5%, to 12,130. The S&P 500 ($INX) added 14 points, or 1.1%, to 1,320, and the Nasdaq ($COMPX) gained 43 points, or 1.6%, to close at 2,781.

Silver prices followed gold downward Friday, losing 26 cents to settle at $32.92 an ounce. Silver has seen a 4.4% correction since Thursday morning; some analysts had predicted an even steeper 10% correction, which could shake out in coming days.

 

The U.S. dollar index was adding 0.3% to $77.29, which could also provide a short-term headwind for silver and gold.

 

Scott Redler, a chief strategic officer for T3Live.com, says that gold prices could move higher but that the metal ran so far so fast it might need a breather. Gold rallied 2.3% in the past week, touching a 2011 high of $1,418 an ounce. The rally had pretty much been a straight arrow up.

 

"If we could stay here and (gold) stays above $1,400 (or $1,390) . . . and (gold) proves that demand is strong, we're going to get that breakout trade," Redler says.

 

Redler trades the SPDR Gold Shares (GLD) and would be adding to his position if gold chops around these levels. Redler says if an investor has a core long at these levels "sell some, let it prove it could hold higher and then add some back for cash flow if we can make those new highs between $1,435 and $1,445."

 

The GLD was hit with some selling, shedding almost 7 tons of gold Thursday. The GLD hasn't added any tons since Feb. 3.

The inflation debate has been swallowed up in the past week by the violent unrest in Libya, but rising commodity prices could remain supportive for higher gold prices.

 

India said food prices rose to 11.49% for the week ending Feb. 12, and U.S. companies are taking a hit in profits as input costs rise. Despite making 60 cents a share in the fourth quarter, Gap (GPS) said annual profits fell short of expectations on higher cotton costs, which the company is having a hard time passing on to cash-strapped consumers.

 

A slew of food and beverage companies like ConAgra (CAG) and Pepsi (PEP) have been saying similar things, but Gap is one of the first retailers to get hit hard.

 

Russia's central bank raised interest rates by 25 basis points Friday. The move was unexpected and was the latest attempt by the country to fight inflation, which is nearing 10%. The country has already stated it will be an active gold buyer this year.

 

The consumer-goods sector and central banks aren't the only ones struggling with high prices; paradoxically, gold mining stocks are also feeling the inflation pinch during this earnings season. Higher gold prices mean the companies make more for their gold, but a rise in global prices -- on everything from oil to labor to taxes -- is squeezing some of the producers.

 

Gold mining stocks were mostly rebounding along with broader equities Friday. Barrick Gold (ABX) rose 1.6% to $51.88, Randgold Resources (GOLD) gained 2.2% to $81.30 and Goldcorp (GG) rallied 4% to $46.98.

 

Newmont Mining (NEM), which was pummeled 7.4% Thursday after the company lowered production guidance for 2011, slipped 0.6% lower to close at $54.46.

 

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