Gold wavers as core CPI flattens

By Alix Steel, TheStreet

Updated at 3:14 p.m. ET

Gold prices steadied Wednesday after shedding 1.5% of their value on a broad market sell-off the day before.

Gold for December delivery slipped $1.50 to settle at $1,336.90 an ounce at the Comex division of the New York Mercantile Exchange. Gold Wednesday traded as high as $1,344.60 and as low as $1,330.10.

Stocks were stabilizing somewhat after Wednesday's collapse as well. At 3:14 p.m. ET, the Dow Jones Industrial Average ($INDU) was down 17 points to 11,006, the S&P 500 ($INX) was up less than a point to 1,179 and the Nasdaq ($COMPX) was adding 5 points at 2,475.

The U.S. dollar index was down 0.2% to $79.03, while the euro was rising 0.3% to $1.35 vs. the dollar. The spot gold price was down $5.10, according to Kitco's gold index.

Gold, for now, seems to have stemmed its furious sell-off from Tuesday as investors stepped in to buy at lower prices. But prices will probably stay in no man's land as uncertainty in Ireland weighs on the euro, helps the dollar and caps any gains in gold.

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Prices plummeted below the key $1,350-an-ounce support level Tuesday and were close to breaking down even further to $1,315, but investors jumped in and tentatively bought on the dip. Jed Handwerger, the editor of GoldStockTrades.com,​ is looking for a correction to $1,250 before he re-enters the market.

"I would be looking for specific patterns. . . . This recent breakout . . . was not really a strong breakout," says Handwerger, who is still looking for a dollar bounce and is urging investors to be cautious. "I've told my readers to be 100% defensive. We have a lot of different issues in the markets right now. . . . We have to be careful of a significant correction."

Promising to weigh on gold prices is the threat of China raising interest rates to fight inflation. The U.S. Department of Labor also said Wednesday that the core Consumer Price Index, an inflation indicator, was unchanged in October month over month. The possibility of decreasing inflation in China and no inflation in the U.S. is hurting investors who bought gold as an inflation hedge.

Also, the International Monetary Fund, eurozone and European Union are pressuring Ireland to take a bailout. Reportedly, Ireland's finance minister will meet with officials from the European Central Bank, EU and IMF on Thursday to broach the topic of aid and to examine the health of Irish banks.

Until investors get some clarity on the Ireland debt situation and what it means for other EU nations like Spain and Portugal, which are also struggling, the euro is expected to stay under pressure, which will support a higher dollar and temper gold prices.

Technical trading is also contributing to gold's volatility right now as options expiration comes at the end of the month and recent sell-offs have triggered sell-stops, in which traders, trying to preserve profits, are forced to sell.

Tonnage, however, in the SPDR Gold Shares (GLD) fund, the most popular gold exchange-traded fund, remains unchanged from last Thursday. The ETF has survived Friday's and Tuesday's double-digit sell-off as investors held on to shares of the ETF. New money might not be flowing into the ETF, but investors appear to be holding on to their current positions despite volatility in gold prices.

The World Gold Council also released its gold demand trend report for the third quarter, which showed that total gold demand grew 12% from the same period a year earlier. Jewelry demand grew 8%, led by emerging market countries like China and Turkey; retail investment rose 25%; gold ETF demand slipped 7% as there was no imminent crisis in the third quarter; industrial demand grew 13% back to pre-crisis levels.

The World Gold Council, which is the sponsor of the GLD, believes that one of the main drivers for high gold prices in the fourth quarter will be recovering demand from emerging market countries like India and China. Typically these countries are very price sensitive, but "rising income levels, high savings rates and strong economic growth (will) continue to push up consumption."

Adrian Ash, head of research for bullionvault.com, also credits China and India with leading gold prices higher. "If you look at the Indian market, a lot of the Indian gold buying is mandated by the religion. . . . Often in India that buying is done by the housewife. What you are seeing now . . . is the husband in the house is now starting to look at gold as a physical investment."

Ash says it's the volatility in gold prices that scares off buyers, not the high prices, and that once prices settle down gold buying should resume in full force. According to the WGC report, jewelry demand in India grew 36% in the third quarter as the rupee rose against the dollar, which helped give consumers more purchasing power despite the fact that gold broke $1,300 an ounce.

Silver prices also recovered on Wednesday, rising 28 cents to settle at $25.51 per ounce, while copper closed flat at $3.73 per pound.

Gold mining stocks, a risky but sometimes profitable way to buy gold, were mostly higher Wednesday. Barrick Gold (ABX) was gaining 0.8% to $49.22, while Newmont Mining (NEM) was 0.6% higher at $59.72. AngloGold Ashanti (AU) was adding 0.3% at $47.14, but Randgold Resources (GOLD) was falling 1.1% to $94.28.

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