Gold climbs on Korean clash

By Alix Steel, TheStreet

Updated at 4:17 p.m. ET

Gold prices settled higher Tuesday as traders digested contagion worries in Europe and an erupting conflict between North and South Korea.

Gold for December delivery added $19.80 to settle at $1,377.60 an ounce at the Comex division of the New York Mercantile Exchange. Gold Tuesday traded as high as $1,382.90 and as low as $1,355.60.

Stocks suffered amid the global uncertainty. The  Dow Jones Industrial Average ($INDU) fell 142 points, or 1.3%, to 11,036. The S&P 500 ($INX) dropped 17 points, or 1.4%, to 1,181, and the Nasdaq ($COMPX) lost 37 points, or 1.5%, to finish at 2,495.

The U.S. dollar index was adding 1.2% to $79.65, while the euro continued to slide, falling 1.9% to $1.34 vs. the dollar. The spot gold price Tuesday was adding $9.50, according to Kitco's gold index.

Gold prices were competing with a stronger U.S. dollar as investors sought haven assets. Spilling over from Monday's session were continued worries that Spain and Portugal won't be able to survive without a European Union and International Monetary Fund bailout despite Ireland's commitment to taking financial aid.

• Find a new broker and start trading online 

The 10-year Treasury yields for Spain and Portugal closed Monday at 4.72% and 6.9%, respectively. Although lower than last week before Ireland took bailout money, the yields are still high compared with Germany's long-term borrowing rate of 2.63%.

The less willing investors are to lend money to countries as they worry about their default risk, the more the countries must raise interest payments to entice lenders. As this pattern continues, the countries face a greater risk of being frozen out of the debt markets.

The worries were pressuring the euro and supporting a stronger U.S. dollar. Also helping the currency were reports that North Korea fired 100 artillery shells toward a South Korean island near their border Tuesday, killing two South Korean marines. The White House has already condemned the attack, and North Korea is saying the incident was provoked.

South Korea is calling the attack "clear military provocation" and is threatening retaliation if there are more attacks. Global conflicts are typically a green light for soaring gold prices, as investors historically pile into the metal as a haven asset, but some analysts attribute gold's rally to technical trading, not fear.

"We've had these saber rattlings before, and nothing came out of it afterwards," says George Gero, a senior vice president at RBC Capital Markets. "Gold today is really concerned with the dollar again being a haven, the euro selling off ... the credit default swaps widening in Europe" and technical trading.

During a shortened trading week, Gero says traders have to roll over or liquidate 200,000 contracts before Dec. 1 to avoid having to put full money up on positions.

"I think gold is going to be up," says Gero. "I just don't think it's going to have the strong up move that it might have (had) based on just this news."

Minutes from the last FOMC meeting were released Tuesday and also paved the way for higher gold prices. The Fed reiterated that inflation was below levels that were consistent with its dual mandate for "maximum employment and price stability."

The language indicated that the Fed's $600 billion bond buying program would continue despite recent protests by critics worried about inflation and a devalued dollar. The Fed will most likely keep running its printing presses and keep helping gold shine as long term inflation protection.

Silver prices gained 11 cents to settle at $27.57 per ounce while copper closed down 5 cents to $3.71 per pound.

Gold mining stocks, a risky but sometimes more profitable way to buy gold, closed mostly lower along with broader equities Tuesday.

Randgold Resources (GOLD) fell 1.8% to $95.78, AngloGold Ashanti (AU) lost 2.2% to finish at $46.96 and Newmont Mining (NEM) dropped 0.6% to $60.59. Barrick Gold (ABX), however, gained 1.1% to close at $50.82.

Related Articles

• Big banks' dividend dilemma
• GDP growth stunted by trade deficit
• Spotting a trend reversal in gold prices