Gold rallies as volatility reigns

By Alix Steel, TheStreet

Updated at 2:40 p.m. ET 

Gold prices rallied Thursday as bargain-hunters jumped into the market for protection against a volatile stock market and global uncertainty.

Gold (-GC) for December delivery soared $39.90 to settle at $1,857.50 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,868.70 and as low as $1,816.20, while the spot gold price was up $41.80, according to Kitco's gold index.

Silver (-SI) prices rose 90 cents to close at $42.53 an ounce, and the U.S. dollar index was 1% higher at $76.21.

Gold prices tanked 3% Wednesday in a sell-off that ignited bargain-hunters looking to buy gold at a perceived discount. Gold, like stocks, will move at the whim of politicians and central banks, with investors trying to find direction among few catalysts.

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"While there may be further liquidation in the pipelines in the short term," said James Moore, a research analyst at FastMarkets.com, "the overall trend in gold still remains firmly bullish, with a growing number of uncertainties set to fuel the metal to fresh highs in the coming weeks and months."

President Barack Obama's jobs speech Thursday night is part of the uncertainty, especially as the number of Americans filing for first-time unemployment claims last week unexpectedly rose to 414,000. Obama is expected to push for a large spending package with an emphasis on infrastructure, which could boost stocks, but many traders are ignoring his policy ideas, as a deadlocked Congress might prevent him from getting anything done.

The buck now passes to central banks, which could also lend support to gold as policies stay accommodative. The European Central Bank kept interest rates at 1.5% Thursday, as expected, and some analysts anticipate a rate cut at the next meeting if economic conditions remain poor. The ECB went on a rate-hiking spree earlier this year to control inflation, now at 2.5%, but the deterioration of eurozone economies might make a more accommodative stance necessary.

The Federal Reserve is up next with its two-day policy meeting in two weeks, where monetary easing will be on the table. Although the initial expectation was another round of bond buying and an expansion of the Fed's balance sheet in an effort to pump more money into the system, experts now think a more conservative approach might win out. A likely scenario is that the Fed would sell short-term securities and buy longer-term ones in order to pressure interest rates even more while keeping its balance sheet the same.

With uncertainty to continue, Carlos Sanchez, an associate director of research for CPM Group, predicts volatility for gold trading in a wide range of $1,700 to $1,950 an ounce. "I think what is going to happen is you may see that this month but it will probably settle into a tighter range as you get more clarity into economic activity," specifically with micro data.

Sanchez says that it could take up to two years for uncertainty to abate and for the U.S. and the eurozone to get their fiscal houses in order, which will keep pushing and pulling at gold. Sanchez thinks gold could hit a new record this year if there is another unexpected shock to the markets.

Despite rumors that central bank selling might have caused gold's sell-off Wednesday, the official sector is still consuming gold. Kazakhstan's central bank said it would buy all of the country's gold production until 2014-2015. According to Barclays Capital the country produced 20 tons in 2010 and should increase production to 33 tons in 2011. Barclays attribute the decision to anxieties toward the "dollar and global economic health."

Bloomberg reported Thursday that Bolivia will also buy gold internally to boost reserves. The country produced 6 tons of gold in 2010 according to the report. Although these numbers aren't staggering, it does underscore a fundamental supply and demand issue with central banks being large buyers of the metal and typically price agnostic.

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Gold mining stocks were trading higher on Thursday, while broader equities slumped. Barrick Gold (ABX) was adding 1.5% at $55.29, and Newmont Mining (NEM) was surging 2.8% to $65.62. AngloGold Ashanti (AU) was up by 0.6% to $46.55, and Goldcorp (GG) was rallying 1.2% to $55.82 per share.