Gold drops by double digits

The metal continues to face selling pressure above $1,400 and can't hold its ground as the US dollar strengthens.

By TheStreet Staff Dec 15, 2010 12:33PM

the streetGold © Comstock Images/JupiterimagesBy Alix Steel, TheStreet

 

Updated at 4:24 p.m. ET

 

Gold prices lost steam Wednesday as the U.S. dollar strengthened and investors cashed in on profits.

 

Gold for February delivery was down $18.10 to $1,386.20 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,398 and as low as $1,383.70 Wednesday.

 

For the third day in a row, stocks rose but then pulled back, as the Dow Jones Industrial Average ($INDU) dropped 19 points to close at 11,457. The S&P 500 ($INX) fell 6 points to 1,235, and the Nasdaq ($COMPX) lost 11 points to finish at 2,617.

The U.S. dollar index was surging 1% to $80.18, while the euro was down 1% at $1.32 vs. the dollar. The spot gold price Wednesday was losing $16.10, according to Kitco's gold index.

 

Gold prices were following their volatility pattern: Any run above $1,400 has been met with selling, while any dips in the price are met with bargain buying.

"Caution prevails in the metals markets," says George Gero, senior vice president at RBC Capital Markets. "I still see $1,370 as the support. . . . We've hit that several times in the recent selloff and always bounced off that."

 

Gero sees $1,425 as the resistance area, although other analysts peg it as low as $1,416 an ounce. The expectation is that money managers will even out their gold positions headed into the end of the year and will perhaps buy back those positions in January.

 

The popular gold exchange-traded fund SPDR Gold Shares (GLD) has shed 7.1 tons since Dec. 1 as investors have taken advantage of the ETF's 24% rally this year to book solid profits.

 

Dip buying, however, is helping gold stay afloat as those who don't own the metal seek selloffs to buy. The cheapest gold ETF, iShares Gold Trust (IAU), added more than 8 tons on Tuesday. According to a report on Bloomberg, the number of shares held in the ETF jumped 7.6% on Monday, the most in four years, which forced iShares to buy more gold.

Gero still thinks prices will "level off and have a steady course for a while" and doesn't know when gold will make a real breakout run.

 

Prices are being pressured from rising rates and a stronger dollar. The yield on the 10-year Treasury note rallied to 3.52% as investors ditched bonds on better-than-expected industrial and manufacturing data.

 

The government was forced to raise the yield to entice investors, which strengthened interest rates and made the dollar more valuable. A stronger dollar provided some headwinds for gold as the dollar-backed commodity became more expensive to buy in other currencies.

 

Gold surprisingly received little support from safety-minded investors Wednesday, even after threats from Moody's that it might downgrade Spain's debt. The agency warned of a similar consequence to the U.S.'s rating on Tuesday.

 

Moody's is concerned about Spain's high financing requirements for 2011, while the country tried to reassure investors that it doesn't need any financial aid.

 

Today's core Consumer Price Index in the U.S. proved to be a mixed bag for gold. The reading for November was in line with expectations of 0.1%, which brought inflation to 0.6% vs. a year ago. Gold is attractive in times of inflation so the lackluster data put a crimp in gold's appeal.

 

On the flip side, low inflation means that the Federal Reserve will likely make no changes to its $600 billion bond-buying program and gives more weight to some analysts' predictions that the Fed will have to issue more rounds of quantitative easing to keep the economy going.

 

The Fed's low-end inflation target is 2%, compared with China, the fastest growing country in the world, which just raised its inflation target to 4%.

 

Silver prices shed 54 cents to settle at $29.25 per ounce, while copper closed down 8 cents to $4.13 per pound. The industrial metals were suffering over worries that debt problems and austerity measures in EU countries might hamper spending. That struggle will take center stage Wednesday in Ireland as the Parliament is expected to narrowly pass approval of its bailout money from the International Monetary Fund and EU.

 

Gold mining stocks, a risky but potentially profitable way to buy gold, finished lower Wednesday.

 

Barrick Gold (ABX) was down 1.2% to $52.53 while Newmont Mining (NEM) lost 1.9% to close at $60.57. Eldorado Gold (EGO) fell 1.8% to $18.04, and Randgold Resources (GOLD) shed 2%, finishing at $88.14.

 

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2Comments
Dec 16, 2010 8:57AM
avatar
doesn't look like anything more than a normal correction. All you need to know is,,, if Ben is still printing tons of money, your gold will get more valuable 
Dec 15, 2010 3:33PM
avatar
Setting the market out but Gold doing good. Should have bought more.
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