Gold spikes, then falls as investors raise cash

After hitting yet another record high on currency interventions and disappointing US economic data, prices pull back as investors look to raise cash where they can.

By TheStreet Staff Aug 4, 2011 10:52AM

Gold © Comstock Images/Jupiterimagesthe streetBy Alix Steel, TheStreet

 

Updated at 5:03 p.m. ET

 

Gold prices shot to new highs Thursday as demand for the haven metal exploded amid currency interventions, global slowdown worries and weak U.S. economic data.

 

However, investors began selling their gold positions to raise cash as stocks plummeted. The Dow Jones Industrial Average ($INDU) tanked by more than 500 points Thursday.

 

Gold (-GC) for December delivery settled down $7.30 to $1,659 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,684.70, another intraday record, before sinking as low as $1,642.20. The spot gold price was falling $14.70, according to Kitco's gold index.

 

After rising more than 4% Wednesday, silver (-SI) prices tumbled $2.43, or more than 5%, to $39.46 an ounce. The U.S. dollar index was soaring 1.9% at $75.27, while the euro was flat against the dollar.

 

Investors were shaken as uncertainty gripped the markets, fueling a dramatic sell-off in stocks and commodities. Weekly initial jobless claims in the U.S. fell by just 1,000 last week to 400,000, and the prior week's figure was revised upward from 398,000 to 401,000. Four hundred thousand is the line in the sand when it comes to jobless claims, as any number above that level signals an anemic job market.  

 

"Some funds are moving to cash," argues Gero, "recent buyers paid high prices and are trying to protect profits for now." Gold prices had been down almost $20 but buyers came in to support prices as many will take advantage of the dip as a "bargain" buying opportunity.

 

Other traders will be looking at gold's price reversal as a short term sell signal. "It doesn't mean the long term trend is over," says Scott Redler, chief strategic officer for T3Live.com, "it just means that if you're trading (gold) for momentum or if you're in heavy . . . you sell some."

 

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Redler thinks that gold could see a short term correction but says that there are still people in the market who want to buy gold on the dip, which only supports the up trend gold has been developing. "But we could use a little rest."

 

Gold prices had been rising after the Bank of Japan intervened in the currency market for the second time this year, although this time without the support of other countries. In essence, the yen and Swiss franc, along with gold, have become safe harbors for scared investors. The result is that as those currencies flirt with record highs against the dollar, companies lose profits as their exports become more expensive to buy in other countries.

 

To help their countries continue to grow, the central banks got involved, with the Swiss central bank slashing interest rates to near zero Wednesday and promising a flood of new Swiss francs into the system. The Bank of Japan followed suit Thursday, buying dollars and selling yen, which was pushing up the dollar 3.35% vs. the yen -- but even that didn't have an immediate impact on gold. If anything, when governments intervene in currency markets it just reminds investors of the instability of paper money, which makes gold more appealing as a form of money.

 

Some short-term traders have been lightening up on positions, but investors were holding back from a full-scale selloff.

 

"Where are you going to put it?" argues Oliver Pursche, a co-manager of the GMG Defensive Beta Fund. "There is enough buying going on that your downside risk, if you aren't a trader, is pretty limited." Pursche doesn't see any fundamental reason that would indicate a significant pullback in gold prices. He even thinks traders who are taking profits now will jump back in if gold breaks through $1,680 an ounce. "If it breaks through $1,680, I think $1,720-$1,750 is very possible."

 

Gold was also helped by mounting concerns that the debt issues in Europe aren't just peripheral and that the risk of contagion is very real. Spain on Thursday had to pay up to borrow money for three years with yields rising to 4.813%, compared with the previous auction of 4.037%.

 

Italy's prime minister, Silvio Berlusconi, is trying to convince the market that the country's fiscal health is fine and that market speculation is what's hurting Italy's borrowing power. The government must pay more than 5.9% in interest to borrow money for 10 years.

 

The second factor driving investors to safe assets is slower-than-expected growth in the U.S. for the second half of the year. "More concerning," Pursche says, is the "downward revision in the first half because it makes our starting point slightly worse."

 

The irony is that Pursche doesn't own gold in his fund but holds silver instead. Silver prices haven't popped as much as gold because they are being weighed on by growth worries -- that slowing growth will eat into industrial demand for the metal.

 

"On a supply-demand basis, gold is overbought," Pursche says, but it "doesn't mean that gold can't move higher. . . . We (just) don't like crowded trades like gold." Pursche thinks that $50 silver in 2011 is pushing it but that if the metal can stay above $41.50, then the next price range would be $43-$46 an ounce.

 

Most investors have been choosing gold over its cheaper cousin. The SPDR Gold Shares (GLD) holds 1,286 tons of gold, up 6.4% since the beginning of July, whereas the iShares Silver Trust (SLV) holds 9,824 tons of silver, up just 3% in the same time period.

Also supporting gold prices Thursday was the news that the Bank of England and European Central Bank did not raise interest rates, leaving them at 0.5% and 1.5%, respectively. The ECB has signaled that more rate hikes in 2011 are likely after it bumped rates up 50 basis points already this year. Inflation is currently 2.7% in the EU, above the ECB's inflation target, but the number was weaker than expected.

 

Gold mining stocks fell Thursday, unable to escape the broad stock-market collapse. Barrick Gold (ABX) sank 5.9% to close at $46.21, while Goldcorp (GG) tumbled 6% to $45.83. Newmont Mining (NEM) dropped 4.7% to $54.44 after being removed Thursday from the short-term buy list at Deutsche Bank (DB).

 

AngloGold Ashanti (AU) slid 4% to $42.07 after reporting earnings of 89 cents a share in the second quarter on gold production of 1.068 million ounces, which was slightly below expectations. Cash costs came in at $705, lower than the $760 an ounce anticipated. The company has lowered 2011 production guidance and raised cash costs, just as Goldcorp did last week. The South African miner now expects to produce 4.45 million ounces this year, compared with 4.75 million on the high end of the previous range. Cash costs are estimated to be $725-$740 versus $660-$685 an ounce.

19Comments
Aug 4, 2011 1:34PM
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After today I have come to the conclusion the markets are a function of A.I. (artificial intelligence, computer trading) because do not think a human mind is running the show anymore.  I can just see the simulation - screw the markets up and panic the average individual get them invested in gold, sell it long at target price, wait for the price to tank then buy back at low price and screw the people.  Oh yea in the mean time invest in low priced stocks that were created as a result of market manipulation.  Then make sure the politicians keep the status quo so the average individuals only choice is 401k.  Then to make sure the pot is boiling keep the worthless press reporting pumping the panic. 
Aug 4, 2011 12:01PM
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Thanks I will, I was thinking that the ones who have just bought in to it may lose a bunch when the short term stockers sell and make killing off of it.
Aug 4, 2011 11:53AM
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This looks like it could be the next asset bubble. Proceed with caution.
Aug 4, 2011 12:54PM
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I was worried about the stock market but they are probably the ones running the price of gold up so they can make more and more. They play on people's worry.Its sick but true.
Aug 4, 2011 2:18PM
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Buy gold now?  Now is the time to buy real estate if you can hold long term and stocks for medium term. Just be sure its the right real estate and stocks not everything is coming back up.

Buy LOW sell high. Today the low is real estate and stocks. Why is this so hard to get?

Aug 4, 2011 2:46PM
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Look at history. Gold fluctuates but long term has been better than anything else - stocks, real estate, mutual funds - everything. When markets go bad, the only real security is in gold because of its intrinsic value - it's not a paper tiger.
Aug 4, 2011 2:51PM
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Specs emptying their shorts - buying to cover.. knowing gold is headed higher in this screwed up economic environment.  Solidly UP.  Bank it!
Aug 4, 2011 1:59PM
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Adam...short gold in this environment? Good luck with that.............
Aug 4, 2011 1:17PM
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Open-mouthed even gold can only go so high. no such thing as going up forever. this could be the time again when there's no place to hide.Disappointed.
Aug 4, 2011 4:49PM
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It is not how high can gold go, but how far will the dollar fall?
Aug 4, 2011 2:52PM
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Looks as if the PPT has jumped into the market with both feet. Amazing how they manage to prop this corpse up.

Aug 4, 2011 1:46PM
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I'll be watching gold...so I can short it when it peaks soon.
Aug 5, 2011 1:32AM
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In the U.S., we only have our elected "officials" to blame. Those in a new trade virtually ALWAYS make mistakes. Some big, some little. Our newly elected "Freshman Class", newbees that they are, made a HUGE mistake!! The gamesmanship that we have just witnessed. The newbees and right wingers didn't want to GO BACK to taxes upon the "rich" that were in effect before President Bush and Congress suspended them. Taxes that affect 2% of taxpayers. As a consequence, those 2% will be able to retain a small percent more each year of their gross earnings, while the overall net worth of the remaining 98% of us AND that 2% will be reduced by percentages well into the double digits. As markets now nosedive, I bet that 98% are going to be pretty angry that our life savings could be halved once again just so 2% of us who make a lot more than 98% of us can save a few additional thousand dollars each year. How could this happen? The only democracy where the interests of 2% of the whole controls.

Aug 4, 2011 10:07PM
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which band wagon should we jump on? Looks like they are all going down the tubes...
Aug 4, 2011 2:05PM
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Smileperhaps you may be too late! Check the price.Smile
Aug 4, 2011 11:40AM
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Looks like it is the time to buy gold as it is high now. maybe the short termers won't sell.
Aug 5, 2011 4:12AM
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A much deserved gold finger salute to one and all! Thumbs up

Aug 4, 2011 4:46PM
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another debacle brought to you by the tea party. The Koch brothers & Grover Norquist Thank You
Awwwww how cute! Someone who can't think for themselves! You realize that there is much more at play than a few politicians that everyone enjoys picking on, right? But don't worry! Your savior Obama will intervene again and... oh wait, he hasn't helped at all! Sorry, my bad.

Try using what brain you have left and we'd all be better off.

Aug 4, 2011 3:39PM
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another debacle brought to you by the tea party. The Koch brothers & Grover Norquist Thank You
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