Gold, silver hit hard

Prices plummeted as rumors of a Chinese interest-rate hike prompt investors to dump the metals and other commodities.

By TheStreet Staff Nov 12, 2010 10:03AM

more commodity and financial news from thestreetGold © Comstock Images/JupiterimagesBy Alix Steel, TheStreet

 

Updated at 4:26 p.m. ET

 

Gold prices tanked by double digits Friday during a roller coaster trading day as rumors circulated that China might raise interest rates.

 

Gold for December delivery shed $37.80, or 2.7%, to settle at $1,365.50 an ounce at the Comex division of the New York Mercantile Exchange. Gold Friday traded as high as $1,410 and as low as $1,359.30 on heavy volume.

 

The interest rate speculation took a toll on stocks, too. The S&P 500 ($INX) lost 14 points, or 1.2%, to close at 1,199, and the Dow Jones Industrial Average ($INDU) fell 91 points, or 0.8%, to 11,193. The Nasdaq ($COMPX) dropped 37 points, or 1.5%, to finish at 2,518.

 

The U.S. dollar index was losing 0.2% to $78.09, while the euro was recovering from an early decline to trade at $1.37 vs. the dollar. The spot gold price was plunging more than $40, according to Kitco's gold index.

 

Gold prices and other commodities suffered as speculation mounted that China might raise key interest rates to combat rising inflation. Thursday's consumer price index showed that year-over-year inflation in the country rose 4.4%, which was higher than expected, despite efforts to take money out of circulation.

China has raised the amount of money banks must keep in reserve multiple times over the past year but inflation still remains an issue. Although inflationary indicators are good for gold as they make the metal more appealing as a safe-haven asset, a rate hike would hurt metal prices, limiting the flow of "free money" in the country and giving consumers less cash to buy gold.

 

The weakness also triggered sell stops, which forces a trader to sell his position when the gold price declines to a certain level. New money appears hesitant to come back into the game until the carnage stops.

 

"Looks like more position sellers from ETFs are starting to appear," says George Gero, senior vice president at RBC Wealth Management "in previous days they were buyers while futures were being sold."

 

Gero also noted that open interest dropped in gold on the Comex which signals that rallies earlier this week were actually sparked by short-covering or option-covering rather than new long positions.

 

In general, the global economic climate is uncertain and equity markets are jittery, leading many investors to sell some of their long positions in gold to raise cash and cover losses elsewhere. Gold has been one of the top performing assets this year, up 27% year to date.

 

"Given the scale of gains posted over the past few weeks the metals remain vulnerable to a deeper correction as traders lock in profits and generate cash to cover margin requirements in other sectors," says James Moore, analyst at thebulliondesk.com, in his daily metals report.

 

Jon Nadler, senior analyst at Kitco.com, believes that without a real crisis gold prices are due for a deeper correction. "The going has gotten fairly tough around $1,425 or so ... these were largely sentiment and momentum-based gains ... The market I see is a market that believes it received a full $1 trillion from the Fed ... Basically we're not in crisis mode."

 

Some could argue that Ireland could spearhead the next crisis with the yield on its 10-year bond soaring to 8.32% on Thursday as fears circulate that the country could default on its debt. The country has enough money to pay its expenses through mid-2011, but markets are worried that Ireland will become the next Greece.

 

Investors were also worried that new regulations on future rescue plans would apply to current European Union bond holders, which would leave bond investors on the hook if Ireland needed a bailout. Eurozone countries said at the G20 meeting that any new restructuring would not apply to "outstanding debt." Traders had been dumping Irish bonds to avoid any new regulations which had pushed yields to new highs.

 

Ireland woes leave the euro on shaky ground and, by extension, the dollar, as they move inversely to each other. Gold, a dollar-backed commodity, typically takes its cue from the dollar -- although that trend can be bucked on days like today -- as a stronger dollar makes gold more expensive to buy in other currencies and vice versa.

 

Uncertainty should continue to provide a choppy trading background for gold. Rumors spread Friday that the EU could provide Ireland with a bailout as soon as next week, but Ireland's finance minister denied these charges.

 

The Group of 20 meeting in South Korea yielded no concrete currency solutions. The leaders of 20 industrialized nations agreed to end competitive devaluation and have the market fix exchange rates but no specifics were outlined.

 

Economic ambiguity and currency volatility should be a positive for gold as investors turn to the metal as a haven asset. But as gold becomes a trading vehicle and not just a long term investment, prices are at the mercy of stock market fluctuations as traders need cash to cover any losses.

 

In the meantime steep corrections in gold have been met with bargain hunting, as people buy the metal for fear of missing the boat at "discount" prices. Volatility could continue especially on the Comex as traders decide whether to roll over their December futures contracts to February. The deadline is Dec. 1.

 

Silver’s price volatility has been even more extreme than gold’s as the thinner market makes it more vulnerable. Prices lost $1.46, or more than 5%, to settle at $25.94 an ounce Friday. Copper closed down 13 cents to $3.89 per pound.

 

The eurozone released weak industrial production numbers for September. The result coupled with a possible rate hike in China have investors worried that countries will spend less on infrastructure, which would crimp demand for industrial metals.

 

Gold mining stocks, a risky but sometimes more profitable way to buy gold, were sinking along with gold and broader equities Friday.

 

Barrick Gold (ABX) fell 2.2% to $50.73 and Newmont Mining (NEM) dropped 2.3% to close at $61.55. Randgold Resources (GOLD) slipped 1.8% to $98.51 and AngloGold Ashanti (AU) lost 3.4% to finish at $49.10.

 

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3Comments
Nov 12, 2010 2:19PM
avatar
Americans dont give a crap about China. We care about our own problem here.   no jobs   borrowing way to much money    government out of touch   at least Republicans  flying coach now    hell the dems just dont get it
Nov 12, 2010 12:44PM
avatar

Maybe China is finally getting a clue and raising an eyebrow as the US comes to it with an application for what would be about the "4th mortgage" on the same place(growing trade deficit).

Ya think?

Nov 12, 2010 11:58AM
avatar

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OOPS to many of theseMartini glassSurprisedMartini glass

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