Gold perks up on Irish debt downgrade
Prices show some life after Moody's downgrades Ireland's bond rating, but headwinds remain.
By Alix Steel, TheStreet
Updated at 3:04 p.m. ET
Gold prices showed signs of life Friday, but the worst might not be over.
Gold for February delivery gained $8.20 to $1,379.20 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as low as $1,365.40 before closing at its high point.
The U.S. dollar index was rising 0.3% to $80.39, while the euro was slipping 0.5% to $1.32 vs. the dollar. The spot gold price Friday was adding $8, according to Kitco's gold index.
Gold has had a difficult and volatile week. The metal started off on a positive note, breaking $1,400 and adding almost $20 in two days. But the rally couldn't hold, and the metal has sunk $33 since Wednesday.
Traders have been selling the metal to book profits headed into year's end, but any substantial dip has been met with buying as fund managers buy gold to show clients that they own the metal.
Volatility was also ripe this week, as Friday is quadruple witching, a day when contracts for stock index futures, index options, stock options and single stock futures all expire.
Gold prices broke a key support level of $1,370 on Thursday but managed to attract enough buyers to close at $1,371 an ounce. Jon Nadler, a senior analyst at Kitco.com, says this recent rally has been momentum-driven and "we could be looking down into the $1,320-$1,350 as a first target." Nadler does not expect bullish sentiment to return "unless gold takes out its previous pinnacle of about $1,430."
Gold prices were finding some support as a haven asset for investors as Moody's downgraded Ireland's government bonds by five marks and maintained a negative outlook. At the final European Union summit of the year, leaders agreed to provide a permanent crisis lending facility starting in 2013, after the temporary one expires, but more radical measures to help short-term problems weren't agreed upon.
Gold markets don't like this kind of uncertainty, and there was some found in the U.S. as well. The Commodity Futures Trading Commission, charged with interpreting the Frank-Dodd financial reform law, agreed to position limits Thursday.
Limits were restricted to 25% of physically settled contracts for the spot month, meaning the month of expiration. According to initial estimates, this just might affect a handful of large-position traders, but the CTFC did not vote on the rule, saying the commission needed more time to digest it. Not only might this spur traders to look overseas, but it might make them resistant to commit new capital until the rule is finalized.
Another potential headwind for gold is a slowdown of physical buying in India. Nadler says rural consumers, who usually buy gold as a store of wealth, will now opt for durable goods like appliances and cars. About "200 to 250 tons per annum is at stake here," Nadler estimates, "China better step up to the (buying) plate."
Also according to reports, India's wedding season, which starts in September and usually lasts three months, is winding down. The season typically prompts strong gold jewelry buying, and the lack of demand could put some pressure on prices for the short term.
Silver prices will take a hit from slumping demand in India as well, as consumers have been opting for a mix of gold and silver jewelry to help offset rising costs. However, silver is in luck, as it is also used in many of the now sought-after appliances and technology items.
Silver added 35 cents to settle at $29.13 per ounce Thursday, and copper closed up 4 cents to $4.16 per pound.
Barrick Gold (ABX) was up 0.2% to $51.72, while Newmont Mining (NEM) was losing 0.2% at $59.81. Randgold Resources (GOLD) was off 0.7% to $87.11, while AngloGold Ashanti (AU) was gaining 0.5% at $48.17.
The popular gold exchange-traded fund SPDR Gold Shares (GLD) was up 0.5% to $134.41 after the ETF shed almost 3 tons Thursday.
Irish history is filled with the day to day challenges of scarcity. If they are really clever, the Irish may race towards default with the knowledge that after their default, the new, and hopefully wiser Ireland will be the first to crawl out of the mess of a failed European Union and hold their own in a redrawn Europe. I wonder what the exchange rate of the punt will be - against gold that is.
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