Gold sustains its rally against falling dollar

Prices drift higher Friday as investors digest the metal's 3.7% two-day surge.

By TheStreet Staff Jan 27, 2012 1:51PM

By Alix Steel

 

Gold (-GC) battled back Friday as a weaker dollar helped stoke momentum behind the metal's 3.7% two-day rally.

 

Gold for February delivery was up $4.20 at $1,730.90 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,734.10 and as low as $1,714.20 an ounce while the spot price was adding $13.40, according to Kitco's gold index.

 

Silver (-SI) was slipping 4 cents at $33.71 an ounce while the U.S. dollar index was down 0.4% at $79.09 on disappointing fourth quarter growth numbers in the U.S.

 

Investors took some profits in early trading as gold prices have jumped 3.7% over the past two days, ignited by the Federal Reserve’s vow to keep rates low until the end of 2014. But any dip in prices was met with strong physical buying as the U.S. dollar headed lower. "Support is at $1,700," says George Gero, senior vice president at RBC Capital Markets. "Resistance is at $1,775 an ounce."

 

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Despite the metal’s recent euphoria, some experts are sounding warning signs. Jon Nadler, senior analyst at Kitco.com, is watching the dollar. "It didn't take a huge hit in the wake of this announcement as one would have expected it to have," he says.

 

Nadler also notes that Fed could still raise interest rates sooner than the end of 2014. "Much like the European Central Bank guessed wrong in raising (rates) too early . . . I think the Fed could be caught eating their words because of not raising soon enough," he said. Six of the 13 voting members at the Fed did vote for raising rates during 2012 or 2013, and most members see long-term interest rates at 4%-5%.

 

So how will physical gold hold up? Nadler is worried the first quarter might be difficult for higher gold prices. "Basically we have physical demand headed into the summer season (likely) ebbing, and unless India steps up to the plate in May with a good off-take, we could meander around this broad channel of about $1,522 to $1,720 an ounce."

 

Indian gold demand fell off a cliff starting in the third quarter of 2011 as prices spiked to an intra-day high of $1,923 an ounce. Demand in the first half of the year, however, was much stronger as consumers bought gold in anticipation of higher prices.

 

Gold's recent rally could have a split effect. It could propel demand, especially if the expectation is that gold prices will run to $2,000 on the Fed's easy money policy, or it could scare Indian investors away as they grapple with higher prices and volatility.

 

Gerald Chen-Young, chief investment officer at the United Negro College Fund -- which invests in the metal -- says that gold is too important in Indian culture to see gold buying end there. "It has industrial use and an aesthetic use . . . they will continue purchasing gold."

 

The physical market offers a good view of gold as a store of value, where prices are climbing faster than those on the futures market. Futures traders are regrouping after Thursday's options expiration, but worries are not surfacing over margin hikes. When futures markets see big spikes, the CME can raise the amount of money traders must shell out to buy a futures contract. It serves to shake out speculators from the market and curb volatility.

 

Gold mining stocks were rallying Friday. Barrick Gold (ABX) was up 1.5% at $49.59 and Newmont Mining (NEM) was rallying 1.5% to $61.35.

3Comments
Jan 27, 2012 5:43PM
avatar

I agree LOE. Good for goldholders, bad for holders of Fiat.

 

But then, I never liked European cars anyway.

 

Gold = the Original Money.

Jan 28, 2012 1:30PM
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So...if Alix STEELE married Jeremy IRONS and had a kid, would they name it.....Heavy Metal?
Jan 27, 2012 3:43PM
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Is this a good thing or bad thing? Thinking Anyways, I couldn't care less because it doesn't affect me in any way, shape or form. Life is grand when things are kept simple! Hot 
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