Gold continues to fall

After Tuesday's dramatic sell-off, prices extend their losses, weighed down by positive jobs data and a stronger US dollar.

By TheStreet Staff Jan 5, 2011 11:19AM

thestreetGold © Comstock Images/JupiterimagesBy Alix Steel, TheStreet

 

Updated at 4:31 p.m. ET

 

Gold prices continued to slide Wednesday, albeit more slowly, after Tuesday's dramatic 3% sell-off, which left traders wondering how to buy the metal.

 

Gold for February delivery settled down $5.10 at $1,373.70 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,385.20 and as low as $1,364.

 

Stocks shook off early losses to rally as reports on private-secotr jobs and the service industry were better than expected. The Dow Jones Industrial Average ($INDU) closed up 32 points at 11,723, the S&P 500 ($INX) gained 6 points to 1,277, and the Nasdaq ($COMPX) rose 21 points to 2,702.

 

The U.S. dollar index was rallying 1% to $80.23, while the euro was sinking 1.2% to $1.315 vs. the dollar. The spot gold price was losing $3.90, according to Kitco's gold index.

 

Gold prices had a painful day Tuesday, shedding more than $40 as sellers booked profits and sell-stops triggered a dramatic sell-off. The skid was attributed to better-than-expected economic data moving investors away from commodities and into stocks, as well as money managers and hedge funds locking in 2010 gains.

As gold prices traded near the 50-day moving average of $1,377, sell-stops were activated, a move in which positions are sold automatically to help traders lock in profits. The sell-off, however, didn't scare ardent gold traders away; it just raised the question of how and when to buy.

 

Scott Redler, the chief strategic officer at T3Live.com, has been trading gold through the SPDR Gold Shares (GLD) fund since 2008 and is lightening up his position while he figures out the next technical move.

 

"Gold is breaking the recent accelerated uptrend," says Redler. "I would recommend you getting down to tier one at best, if any. We need to figure out the composure moving forward."

 

Redler is still a believer in higher gold prices for 2011 but is not sure at what level. Gold's next support area is around $1,320, and then the 200-day moving average of $1,265 an ounce.

 

Doug Kass, a contributor at RealMoney.com, thinks gold could be one of the worst-performing assets of the year despite the fact that prices popped 400% in the past decade.

 

Big corrections in gold prices, however, are nothing new. There was one in early 2010 when spot gold prices sank almost $100 from their high in January to their low in February.

 

Pratik Sharma, the managing director at Atyant Capital, says the sector "inhales and exhales 20%-30% at least once or twice a year."

 

Extreme selling has typically been met with stronger buying, which has helped stem gold's free fall. GLD shed only 4 tons Tuesday, indicating there are still long holders in the market. But the momentum money will most likely stay on the sidelines in the short term to make sure the correction has completely shaken out.

On the fundamental front, recent inflationary indicators might prove helpful for gold. On top of the eurozone's larger-than-expected 2.2% inflation reading for December, the Financial Times reported that food costs in the U.K. rose 5.5% in the past year, well above their high but tolerable 3.3% inflation rate. The eurozone also reported November's producer price index reading of 4.5%, slightly higher than anticipated, as energy costs rose.

 

The mounting inflation news is putting governments in a bind. With economic growth still anemic, raising interest rates to fight inflation might not be a practical solution. In fact, countries like the U.K. have actually hinted at more quantitative easing, and trouble hasn't shaken out of EU nations either.

 

Portugal raised €500 million in short-term loans but had to pay up for the money. The average yield jumped to 3.83% vs. 2.04%. Higher yields indicate that investors are reluctant to lend money to the country and therefore must be enticed by higher interest rates.

 

Gold prices will also have to factor in a decision from China to let its currency, the yuan, rise 5% vs. the dollar in 2011. Logic dictates that a stronger yuan would mean a weaker dollar, which would be good for gold prices, as the two typically move inversely to each other. A stronger yuan could also increase China's purchasing power, increasing its citizens' ability to buy gold.

 

Jon Nadler, a senior analyst at Kitco.com, argues that a beefed-up Chinese currency will probably be neutral for gold. One possible scenario is that "upward revaluation means a tougher time for local exporters, which could imply less money available among the wealthy to spend" on gold.

 

Short-term gold prices were taking their direction from a better-than-expected Automatic Data Processing employment report that said the U.S. private sector added 297,000 jobs in December -- almost triple what was anticipated. Expectations are high headed into Friday's jobs number, with analysts looking for 175,000 nonfarm private jobs to be added, according to Briefing.com.

 

Better data are hurting gold, as investors see less need for the haven asset.

 

Silver prices shed 31 cents to settle at $29.20 per ounce. Copper closed up 4 cents to $4.41 per pound.

 

Gold mining stocks, a risky but potentially profitable way to buy gold, continued to fall after getting clobbered Tuesday.

 

Barrick Gold (ABX) slid 3.4% to $49.90 while Newmont Mining (NEM) fell 1.6% to 58.16. Randgold Resources (GOLD) shed 3.1% to $78.17, and Eldorado Gold (EGO) lost 1.2% to finish at $17.64.

 

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3Comments
Jan 5, 2011 5:09PM
avatar
As the gold bubble deflates & bursts, the oil bubble which is already forming around $90 per barrel is inflating.  Can anyone say time to buy the oil majors.
Jan 5, 2011 12:31PM
avatar

Predicted this months ago.  As the economy trends up, gold trends down. 

 

Eagerly awaiting a 1982 80%, 1 week sell of, so I can say "Told you so"!  May not happen for a few months, but its clear gold is now trending down.  The bubble has peaked, and sometime this year, will burst.

Jan 5, 2011 11:26AM
avatar

still waiting for the day when gold drops like it's weight! i'll propbably be having a root canal done and the freezing wears off!Surprised

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