Gold wavers as volume thins

Without a crisis catalyst from North and South Korea, gold might just bump along at current levels.

By TheStreet Staff Dec 21, 2010 11:18AM

more metals and commodities investing resources from thestreetGold © Comstock Images/JupiterimagesBy Alix Steel, TheStreet


Updated at 4:45 p.m. ET


Gold prices drifted up slightly Tuesday as technical trading continued amid light volume ahead of the Christmas holiday.


Gold for February delivery added $2.70 to settle at $1,388.80 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,393 and as low as $1,381.40.


Stocks had a far better day: The Dow Jones Industrial Average ($INDU) closed up 55 points to 11,533, a level not seen since Aug. 2008, before the collapse of Lehman Bros. triggered the global financial crisis. The S&P 500 ($INX) finished up 7 points to 1,255, and the Nasdaq ($COMPX) rose 17 points to 2,667, its best close since Dec. 2007.


The U.S. dollar index was up 0.1% to $80.68, while the euro was slipping 0.2% to $1.31 vs. the dollar. The spot gold price was off 10 cents, according to Kitco's gold index.


Gold prices might have started their long holiday weekend a little early this year as worries in the European Union, tension in the Koreas and end-of-year book-squaring did little to boost prices past $1,400 an ounce.

"Prices are probably going to remain flat," says Phil Streible, a senior market strategist at Lind-Waldock. But "there's still a lot of investor buying, there's still a lot of questions around the eurozone, . . . so there is underlying support."


Moody's ratings agency has been declaring war on eurozone nations, threatening a downgrade of Spain's debt as well as some of its banks and issuing a downgrade of five Irish banks Monday. Moody's on Tuesday also placed Portugal on review for a possible downgrade citing "longer-term economic vitality."


Although the credit markets have been worried about EU debt issues for a year, an official downgrade would make it even harder for the countries to raise capital through the debt markets. Portugal's and Spain's long-term borrowing costs rose Monday to 6.6% and 5.55%, respectively, as the countries had to pay up to entice investors to lend them money.


Despite the worries, the euro was rallying slightly on comments from China Vice Premier Wang Qishan that China will support efforts to stabilize the European debt crisis. The news helped the euro and weighed on the dollar.


Gold's modest rally Monday didn't look set to continue as investors chose to lock in profits for the end of the year instead. George Gero, senior vice president at RBC Capital Markets, credited the rally to investors covering their short positions, "buying previously sold positions as open interest is not growing." Gero still sees $1,370 as a support area and $1,425 as resistance.


An explosive conflict between North and South Korea didn't materialize as North Korea backed off previous statements that it would retaliate after South Korea's military exercise off the coast of Yeonpyeong. Analysts thought that any immediate conflict could push prices up to $1,425, but without that crisis catalyst, gold might just bump along at current levels.


Streible has been nibbling away at gold futures "to be positioned before the start of the year because I think right out of the gate I think funds and allocation models are going to start coming out and are going to be more heavily weighted towards metals."

One interesting item to note was the earnings from packaged-foods company ConAgra (CAG). The company reported a 16% fall in profit, in part due to rising commodity costs that the company couldn't pass on to cash-strapped and discount-minded consumers.


From the Federal Reserve's standpoint, inflation in the U.S. is too low, with the most recent core Consumer Price Index reading for November pegging inflation up 0.6% vs. a year ago. But food companies are saying something different.


ConAgra's CEO Gary Rodkin said, "Higher-than-planned inflation weighed on Consumer Foods' profits despite progress in overall unit market shares and volume." Rodkin also sees cost inflation accelerating.


Gold is very attractive for investors in times of inflation because the metal retains more of its value as a store of wealth. Many long-term investors had been buying gold as a hedge against inflation, which, as of yet, hasn't materialized. Consistent reports from food providers like ConAgra might reignite this thesis for gold.


Silver prices settled up 4 cents to $29.39 per ounce, while copper added 7 cents to close at $4.28 per pound.


Gold mining stocks, a risky but potentially profitable way to buy gold, closed mostly lower Tuesday.


Barrick Gold (ABX) slipped 0.4% to $51.68, while Newmont Mining (NEM) fell 0.3% to $60.04. Randgold Resources (GOLD) dropped 2.7% to $84.79, and AngloGold Ashanti (AU) finished down 0.8% at $47.88.


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