Gold slides after weeklong rally

Prices slip despite inflationary headlines as traders swap the metal for stocks.

By TheStreet Staff Dec 5, 2011 1:08PM

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


Updated at 4:44 p.m. ET


Gold prices were falling Monday as investors cashed in on the metal's almost 4% rally last week.


Gold (-GC) for February delivery settled down $16.80 at $1,743.90 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,758.80 and as low as $1,732.20 an ounce, while the spot price was down $23.20, according to Kitco's gold index.


Silver (-SI) finished 7 cents lower at $32.69 an ounce, while the U.S. dollar index was down 0.1% at $78.57.


After steady gold buying from Asia overnight, Western traders took advantage of the price move to lock in gains Monday morning.


Gold was also decoupling from the stock market after the two had been moving in tandem of late. Any sell-off in stocks can prompt gold selling, as investors need to raise cash. On the other hand, if markets head higher and traders want to put more cash to work, they might be more likely to sell gold than a stock up 10% for fear of missing an extended rally.


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The latest commitment of traders report for the week ended November 29th showed that total long positions decreased by 28,000 contracts and short positions sunk 21,000 contracts. This means that part of gold's recent rally was due to short covering.


"Speculative financial investors are still showing reticence," wrote CommerzBank. Still, gold prices this week will still be shaped by the sovereign debt crisis in Europe, said CommerzBank.


There are many reports swirling about major financial initiatives to help stabilize Europe. The central banks of several European nations, through the European Central Bank, could lend up to 200 billion euros to the International Monetary Fund, which could then lend that money back to weaker European governments. The Federal Reserve could also be prepping to lend more money to the International Monetary Fund along with the ECB. The ECB could also be lining up 1 trillion euros to buy sovereign bonds if deeper fiscal consolidation among the 17 nations using the euro is agreed upon.


The ECB is also meeting on Thursday. After cutting rates by 0.25% at its last meeting, the expectation is that it could do so again. "Our economists anticipate a rate cut of 25 basis points to 1%," says CommerzBank. "This should lend support to the gold price since the opportunity costs of holding gold will remain low." When interest rates stay lower than inflation rates, currently at 3% for the Eurozone, cash in the bank is worth less, which makes gold more attractive to own.


D-day for the eurozone will start Friday at a two-day European summit where leaders are expected to discuss a plan for tighter fiscal unity, which means there will be legal ramifications if a country doesn't reduce its budget deficit by the agreed upon amount -- a lack of sovereignty for more unity.


Gold will also be held hostage to the U.S. dollar. A strong rally in the currency, either on haven buying or a devalued euro, will pressure gold, while any deep sell-off in the greenback will support gold prices, as the metal becomes cheaper to buy in other currencies.


"The U.S. dollar index appears to be topping out," says Mark Arbeter who also acknowledges that the index could make one final push higher adding short-term pressure on all commodities including gold. However, in the longer term, Arbeter thinks "gold could challenge its all-time highs up near $1,900 an ounce and possibly reach $2,000 an ounce early next year."


Gold mining stocks closed lower Monday despite gains in broader equities. Barrick Gold (ABX) shed 1.5% to finish at $50.27 while Newmont Mining (NEM) fell 1% to $66.34.


Among other gold stocks, Goldcorp (GG) slipped 0.7% to $51.03 after it increased its annual dividend to 54 cents a share.


NovaGold (NG) fell 1.3% to $10.62 after releasing its updated feasibility study for Donlin Creek in Alaska, which it co-owns with Barrick.


Donlin will produce 1.5 million ounces of gold at cash costs of $409 an ounce for the first 5 years of production and then 1.1 million ounces of gold a year for 22 years at $585 an ounce. The gold is split evenly between Barrick and NovaGold. Capital expenditures for the next 5-6 years are $6.7 billion -- $300 million lower than previously reported -- which accounts for the construction of a natural gas pipeline and a big contingency buffer of $1 billion. NovaGold is responsible for half of the expenditures, or $3.35 billion.

Dec 5, 2011 2:24PM
Thank you Mr. Steel for reporting on precious metals! Sarcastic
Dec 5, 2011 5:52PM

Mr Steel? Methinks you might want to research this writer a bit more, LOE.


Ms. Steel is my favorite reporter on all things "gold".


Still awaiting a radical jump to sell, likewise a radical slump to buy.

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