Gold rallies on weak dollar

By Alix Steel

Gold prices were rallying Monday as the U.S. dollar weakened and demand for the physical metal picked up.

Gold (-GC) for December delivery was adding $29.50 at $1,715.20 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,722.40 and as low as $1,684 an ounce, while the spot price was up $30.10, according to Kitco's gold index.

Silver (-SI) was rising $1.19 at $32.21 an ounce, while the U.S. dollar index was down 0.7% at $79.07.

Gold was getting a boost as the U.S. dollar weakened against the euro, making the dollar-backed metal cheaper to buy in other currencies. The euro was rallying on reports that eurozone nations led by German Chancellor Angela Merkel and French President Nicolas Sarkozy were in talks to create more fiscal unity among the 17 countries that share the currency. In other words, the austerity measures already agreed to would be enforced by the eurozone and member nations would, in essence, give up some sovereignty to save the currency.

The hope is that the European Central Bank will then feel more confident about becoming the lender of last resort by buying more sovereign bonds for an extended period -- something the central bank was reluctant to do because it thought struggling countries would have less impetus to implement austerity measures. The ECB has been offering limited short-term lending to countries like Greece, Italy and Spain but has done little to lower longer-term borrowing costs as private investors shy away from Europe without the ECB's extended support.

Related Articles

• Is gold's rally a fake-out?
• Dogs of the Dow may be mutts in 2012
• Fed should adopt flexible gold standard

There were also rumors that Italy would tap the International Monetary Fund for aid. Although later denied by the European Commission, the news helped to support the euro, weighing on the dollar and helping gold.

Further cheering the gold market was strong physical buying. The SPDR Gold Shares ETF (GLD) now holds almost 1,300 tons as investors ramp up gold buying on last week's sell-off. With stocks mounting a big rally Monday, traders also had less need to liquidate their gold positions.

In the most recent commitment of traders report for the week ended Nov. 15 (the latest report was delayed because of Thanksgiving), investors added 13,000 total long contracts and 17,000 short contracts, which means part of gold's recent rally could be chalked up to short covering.

"It's a little bit of a trifecta," says Oliver Pursche, a co-portfolio manager of the GMG Defensive Beta Fund. "Great retail U.S. news, you've got some positive momentum out of Europe, to a certain extent there is a little bit of short covering, and the fourth piece is China."

Pursche thinks China is getting ready to slowly turn around its monetary policy. "I think that if you listen to what the finance ministers are saying, they are all talking about the fact that they have achieved the desired slowdown in the housing market." Pursche thinks that with housing prices down 30% in some areas and with more pressure on the yuan to rise in value along with a possible recession in Europe, China will be forced to pump more money into the system.

"Investor demand is unlikely to drive prices significantly higher in the short term," says Pursche. "What will drive prices higher are fears of inflation . . . if you see the ECB print money, the Federal Reserve, China change monetary policy -- that would all be supportive of $2,000 gold prices."

Bloomberg reported Monday that 16 out of the 21 primary dealers that trade U.S. government securities with the Fed expect the central bank to buy more mortgage-backed securities -- to launch a third round of quantitative easing. From 2008 until June of this year -- during which the Fed launched two QE programs -- gold prices rose 106%, which means prices could hit $3,500 using the same metrics.

Randgold Resources (GOLD) was in the hot seat Monday after lowering 2011 gold production guidance for the second time this year. The West African gold miner is now expecting to produce between 690,000 and 700,000 ounces, versus 760,000 ounces on the high end.

The miner had already lowered guidance from 790,000 ounces because of unusual wet weather in Ivory Coast, and weather again played a role in the revision. But this time there were other problems: a temporary work stoppage in late November due to union negotiations; a longer-than-expected​ transition from diesel to the national power grid, although this will be a significant cost saver for the company long term; and a failure of its barring gear in its No. 1 mill Friday, which caused its No. 2 mill to be shut down as well. The No. 2 mill should be restarted Tuesday, but it could take 10 days for the No. 1 mill to get back on line.

In the third quarter, Randgold missed on earnings, revenue and production, but investors gave the stock a free pass because of its high growth rate -- its profit ballooned 335% compared with a year earlier, and production was up 9%. David Christensen, the CEO of ASA Gold and Precious Metals (ASA), who is a believer in Randgold's long-term growth strategy, said "the market is taking those who do not perform out to the woodshed, no matter how good they have done in the past. Investors are just itching for reasons to sell or short a name." Christensen thinks the pressure on Randgold will pass.

Other gold mining stocks were soaring Monday. Barrick Gold (ABX) was rising 5.2% to $49.90, while Newmont Mining (NEM) was adding 3% at $65.70. Goldcorp (GG) was rallying 3.6% to $49.56, and NovaGold (NG) was skyrocketing 10% to $10.64.