Gold surges past $1,400 on jobs data
Prices rally on weaker-than-expected employment growth and an uptick in the unemployment rate.
By Alix Steel, TheStreet
Updated at 4:25 p.m. ET
Gold for February delivery settled up $16.90, or 1.2%, at $1,406.20 an ounce at the Comex division of the New York Mercantile Exchange. Gold Friday traded as high as $1,409.90 and as low as $1,385.30.
After a disappointing start, stocks rallied late in the day on the strength of the tech and commodity sectors to finish with modest gains. The Dow Jones Industrial Average ($INDU) rose 20 points, or 0.2%, to close at 11,382. The S&P 500 ($INX) edged higher by 3 points, or 0.2%, to 1,225, and the Nasdaq ($COMPX) added 12 points, or 0.5%, to finish at 2,591.
The U.S. dollar index was losing 1.4% to $79.21, while the euro was adding 1.4% at $1.34 vs. the dollar. The spot gold price was soaring $29.50, according to Kitco's gold index.
Gold prices moved higher on the back of a very disappointing November unemployment report out of the U.S. as investors sought the safety of the precious metal. Nonfarm jobs increased 39,000, while the private sector added 50,000 jobs. The unemployment rate rose to 9.8%, the highest level since April 2010. All the results were significantly below expectations.
"[I] expect that traders think recovery is not around the corner after this," says George Gero, senior vice president at RBC Wealth Management. "Disappointing jobs [will] dominate today's action [and we] could have record prices."
Gold prices were also finding support as the euro gained on better-than-expected October retail sales from the 16 eurozone nations as well as speculation that the European Central Bank is buying Portuguese and Irish bond.
Despite the fact that ECB President Jean-Claude Trichet did not deliver a shock-and-awe attack on debt problems during the central bank's meeting on interest rates, the news that the ECB is not abandoning the EU nations and is trying to support the euro calmed jittery investors for the near term.
The news propped up the euro while the weak jobs data fueled speculation that the Fed would continue its monetary easing policy. Both factors weighed on the U.S. dollar, in turn helping boost gold prices.
"How much higher do we go when every other commercial on TV or in print publications talk about the importance of buying or selling gold?" says Sam Stovall, the chief investment strategist at Standard & Poor's equity research division. "Our view from a technical perspective is that we could eclipse the $1,500 in the next couple of months, and longer term we don't think that $2,000 per ounce is out of the question."
Stovall cites the recurring debt worries around the globe as highlighting gold's appeal as a haven asset. In addition, with interest rates historically low, investors' rate of return on cash is also low, which makes gold attractive as a higher store of value despite the fact that it doesn't pay a dividend.
However, low interest rates may not continue forever. According to reports from Xinhua, the Chinese state-run newspaper, the Politburo, the crème de la crème of the Communist party, is throwing its support behind a more "prudent" growth strategy. Fiscal policy will still be "proactive," meaning that investment spending would still be encouraged but that a loose monetary plan was no longer desired.
This paves the way for interest rate increases from the central bank, the most aggressive way to combat inflation. Already this year the People's Bank of China has tried to decrease the amount of money in circulation by raising the amount of yuan banks must hold in their reserves. The moves haven't had the desired effect, however, as inflation is now 4.4% higher than a year ago.
A rise in interest rates would damage inflation expectations and might force some traders who were buying gold as a hedge to rethink their positions. Also, a higher borrowing rate might hurt gold investment and physical demand, which has been instrumental in pushing prices higher.
Xinhua also reported Thursday that China imported 209.7 metric tons in the first 10 months of 2010, which is 7.4 million ounces. The figure beats the gold exchange-traded fund SPDR Gold Shares (GLD), which added only 164.36 tons, or 5.8 million ounces, in the same period. Any substantial slowdown in purchasing power and gold demand would severely weigh on prices.
Adrian Ash, the head of research for bullionvault.com argues that China's central bank would have to "raise interest rates by a long way before it really makes a difference for cash savers."
James Moore, an analyst at thebulliondesk.com, also predicts that gold prices will continue to find support from haven and physical buyers but that "with risk appetite increasing the more industrial metals are likely to perform more strongly."
Silver prices added 70 cents to settle at $29.27 per ounce, while copper closed up 2 cents at $4 per pound.
Randgold Resources (GOLD), however, slipped 0.7% to $93.59 after Oriel Securities downgraded the stock on Friday to "reduce" from "hold," citing concerns that the company will miss its full-year production guidance of 445,000 ounces of gold. Oriel blames rising tensions in the Ivory Coast, which could disrupt production at its mines in the area.
On Nov. 8, Randgold started production at its new Tongon mine in the region, which has the potential to produce 300,000 tons a month when it is operating at full speed.
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