Gold gains after spectacular 2011 finish

A strong euro boosts prices to more than $1,600 despite weak demand in India.

By TheStreet Staff Jan 3, 2012 1:53PM
Image: Gold (© Anthony Bradshaw/Photographer)

By Alix Steel


Updated at 2:35 p.m. ET


Gold (-GC) rose to more than $1,600 an ounce Tuesday on new-year buying.

 

Gold prices for February delivery were up $37.40 at $1,604.20 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $16.08.70 and as low as $1,566.80 an ounce, while the spot price was up $38.20, according to Kitco's gold index.

 

The price of silver (-SI) was up $1.74 at $29.65 an ounce, while the U.S. dollar index was down 0.65% at $79.60.

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A weaker U.S. dollar and stronger euro were boosting prices into 2012 after a spectacular 10% gain for 2011. While a 10% gain might attract investors looking for top-performing assets after the S&P ended the year flat, investors who remember gold's volatility -- the metal closed down 18% from its intraday high of $1,923 -- might be reluctant to buy.

 

Gold is also overcoming disappointing import news from India. The Bombay Bullion Association said the country imported 125 tons of gold in the fourth quarter of 2011, down 55% from expectations despite strong seasonal factors such as Diwali, the festival that boosts demand for gold. India imported 878 tons in 2011, which was down more than 8% year over year. To make matters worse, in the first quarter, India might import 143 tons -- half of what it did in 2011.

 

"For the time being, the gold price will not find any support from this side," Commerzbank wrote. Demand became battered as gold became too expensive to buy in rupee terms and as interest rates remained high. Investors may look to China to make up for lost demand.

 

"I do see (the slowdown in India) as an aberration . . . but China is continuing to gain on India in terms of consumption of gold," said Marcus Grubb, the managing director at the World Gold Council.

 

China represented 28% of global jewelry buying in the third quarter and, for only the fourth quarter since 2003, outpaced India in its demand. Grubb says China benefited as it let its currency be revalued upward against the dollar versus India, which had to contend with a falling rupee -- making it more expensive to buy gold.

 

"We think imports into China could be 400 tons this year," Grubb said. China might be on track to consume 747 tons of gold in 2011. India's gold market was deregulated 20 years ago compared with just 10 years for China, which Grubb says means China's rate of consumption is catching up to India's. Grubb also noted that it needs to continue that trajectory as Indian demand slows.

 

Gold mining stocks were soaring Tuesday, including Barrick Gold (ABX) and Newmont Mining (NEM).

 

Other gold stocks, such as Goldcorp (GG) and NovaGold (NG), were also trading higher.

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