Gold loses steam as Italy announces reforms

By Alix Steel, TheStreet

Updated at 2:33 p.m. ET

Gold prices settled lower Friday as investors toyed with safe assets amid mounting fears of a global downturn but ultimately opted for stocks after Italy agreed to reforms that will pave the way for the European Central Bank to begin purchasing Italian and Spanish bonds.

After a roller-coaster day, gold (-GC) for December delivery settled down $7.20 to $1,651.80 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,673 and as low as $1,644.20, while the spot gold price was last adding $6.20, according to Kitco's gold index.

Silver (-SI) prices closed down $1.22 at $38.21 an ounce. The U.S. dollar index was down 0.9% at $75.08, while the euro was rallying 1.2% against the dollar.

Gold got caught in the flood of selling Thursday as investors fled all assets, but the metal rebounded early Friday as investors searched for some haven as a relatively upbeat U.S. jobs report wasn't enough to offset fears of a global economic downturn.

The Labor Department said the U.S. economy added 117,000 jobs in July, exceeding the growth of 84,000 that economists had expected, according to Briefing.com. The unemployment rate dropped unexpectedly to 9.1% from 9.2% in June. Economists had anticipated an increase to 9.3%.

Although better than expected, there are still 14 million unemployed people in the U.S. and other data points to slowing growth, like weaker manufacturing figures and lousy GDP numbers.

As a result, talk of recession has emerged once again. Plummeting stocks alone aren't enough to signal a recession, but lower stocks, lower growth, lower manufacturing activity and high unemployment "add to existing concerns," according to a report from Sam Stovall, Standard & Poor's chief investment strategist.

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These worries go a long way to help gold prices despite the fact that prices have already rallied more than 5% in the past week and are at record levels. But gold sold off Friday on news that Italy would implement austerity measures sooner than expected and speed up fiscal consolidation to balance the budget by 2013, igniting a late-day rally in stocks.

The European Central Bank might now buy Italian and Spanish bonds, desperately needed as the countries' borrowing costs are soaring, as the governments tackle their debt issues. The Italian prime minister has been in contact with his counterparts from Spain, Germany and France. Investors were cheered by the EU's ability to take on its debt issues and dumped gold for stocks.

"I think the whole world was looking at the $1,680 (level)," says Dave Kavanagh, CEO Grant Park Fund, who said Thursday's selloff was a case of investors taking everything off the table. "I think the short-term traders were selling against it."

Kavanagh said if the dollar rallies big, then gold could sell off as much as 10% from its intraday record, which would take gold to about $1,484 an ounce. "Does that mean the run in gold is over? Absolutely not," he said. The dollar could rally on short-covering and technical trading, according to Kavanagh, but in the long term it's not any better than other fiat currencies -- which leaves gold as the only real form of money.

"I still think there is substantial percentage upside in gold. . . . I think there is nowhere else to put money right now," argues Kavanagh.

Gold is also on the verge of entering a seasonally strong buying period that lasts through December, which is another bullish signal for prices. But at record high levels, price sensitive consumers might be reluctant to buy.

Pat Heller, general manager at Liberty Coin Service, said that buyers are still stepping up to buy "not as much as they did in March and April, but definitely more than bought in May and June."

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Heller points out that on the flip side, high prices are also igniting a surge in liquidation by retail consumers.

"Because of the general balance between demand and liquidation, most coins/ingots are still readily available and the premiums are not rising," he said. Premiums rise with demand when investors are willing to pay more for the metal in case of a shortage. A typical premium is about 10%.

Gold mining stocks, which were hit hard on Thursday, were mixed on Friday. Barrick Gold (ABX) was down 0.5% to $45.98 while Newmont Mining (NEM) was up 0.8% at $54.86. New Gold (NGD) was falling 5% to $10.02, and AngloGold Ashanti (AU) was adding 0.2% at $42.16.

Silver stocks were struggling, with Silver Standard Resources (SSRI) falling 2.1% to $25.81 and Silver Wheaton (SLW) down 2.7% to $34.14.