Gold drifts higher on rate decisions

By Alix Steel, TheStreet

Updated at 3:29 p.m. ET

Gold prices edged higher Thursday as central banks in Europe left interest rates unchanged and as the U.S. dollar softened. 

Gold (-GC) for December delivery settled up $11.60 at $1,653.20 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,656.80 and as low as $1,633.20 an ounce, while the spot gold price was lower by $2.30, according to Kitco's gold index.

Silver (-SI) prices rose $1.65 to finish at $32.01 an ounce while the U.S. dollar index was down by 0.4% at $78.64.

Gold prices were struggling to find direction as the Bank of England and the European Central Bank both left interest rates unchanged Thursday.  

The Bank of England will keep interest rates at 0.5% and will raise its asset purchase program by 75 billion pounds to 275 billion to stave off a possible recession in Britain, as the country grew only 0.6% in the second quarter.

The European Central Bank, which has raised interest rates twice this year to 1.5% to fight inflation, now at 3%, also left rates unchanged. The recent blowup of the sovereign debt crisis makes it hard for the ECB to constrict the money supply further. However, some experts are anticipating a possible rate cut, or at least hints of one, as this is Jean-Claude Trichet's last meeting as president.

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"Gold's unusual behavior at present can be explained by events on the futures market," wrote Commerzbank in a morning note. As speculative futures traders sell their gold positions to raise cash, demand from physical buyers steps in. "This pattern is likely to mean the price of gold fluctuating for quite some time within a broad sideways range before a new upturn begins."

A new trend might be hard to find this week with investors focusing on the death of Apple (AAPL) founder Steve Jobs and Friday's reading on employment in the U.S.

Briefing.com expects the private sector to have added 90,000 jobs in September after adding only 17,000 in August. A better reading could boost equities and help markets continue to rally, which might push gold higher as there is less need to sell. Of course, the opposite could be true as well: a positive jobs number could give investors less of a reason to own the haven asset.

A bad number, on the flip side, could either help gold shine as a haven or could prompt more forced liquidation.

Jeff Clark, Casey Research's Senior Precious Metals Analyst, says, "When the market falls I think that investors will seek out liquidity and they will use an easily tradable gold position to do that." But Casey argues that this volatile and confusing time for gold is really a tiny blip on its long-term trajectory. "Debt is still crushing most of the developed world . . . (and) real interest rates are still negative." The real interest rate is the interest rate minus inflation.

"Governments show little sign of training their ways from printing money to saving, investing and being more conservative," argues Casey. "When the currency is being treated like that . . . gold's long-term strength is really as a long-term currency."

Casey says that although gold fell 10% in September, it wasn't a complete freak-out by investors. "A freak-out would take gold to $800 (like) in 2008 (when) gold lost a third of its value." Casey thinks this price dip in gold is a good buying opportunity, but warns that investors shouldn't go all in just in case prices fall further.

The one wild card for gold is if the European Union can come up with a decisive plan to recapitalize European banks, so that even if Greece does default, the financial system will be able to survive. If that happens, then gold's role as a haven might dissipate. But although the sentiment is there among leaders, there has been little agreement on a plan of action.

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Gold mining stocks were trading mostly higher Thursday as broader equities surged. Barrick Gold (ABX) was up 2.4% to $47.37, and Newmont Mining (NEM) was adding 0.5% at $63.35. AngloGold Ashanti (AU) was falling 1.3% to $41.20, while Goldcorp (GG) was gaining 2.9% to $46.93.