Gold steadies on weaker dollar
Prices stabilize after Thursday's tumble, rising slightly as the greenback slips.
By Alix Steel, TheStreet
Updated at 4:15 p.m. ET
Gold prices steadied Friday after a dramatic 3% one-day sell-off as the U.S. dollar came under pressure.
Gold (-GC) for December delivery rose $4.90 to settle at $1,725.10 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,738.50 and as low as $1,711.40, while the spot gold price was up $2.40, according to Kitco's gold index.
Silver (-SI) prices settled up 92 cents at $32.42 an ounce on the heels of Thursday's nearly 7% sell-off. The U.S. dollar index was down 0.3% at $78.05.
Gold prices were stabilizing after a broad market sell-off Thursday that indiscriminately dragged down stocks and commodities. At the core of gold's volatility is fear radiating from the eurozone as borrowing costs rise for Spain, Italy and France. Anything that pressures the euro and spooks markets bleeds into gold, as investors need to raise money to cover losses or just want to play it safe and move their money into cash.
"When you have a sharp market sell-off, you get fund redemptions, you get individuals closing accounts or taking money out, and you get margin calls," explains Adrian Day, the president of Adrian Day Asset Management, "and you get forced selling."
Day believes investors sell what they can, not what they want to, and as a result gold prices will stay volatile but keep moving higher. "People have been buying gold because they don't trust paper money . . . and nothing has changed in that respect."
Not everyone agrees. Jon Nadler, a senior analyst at Kitco.com, is very concerned that gold prices aren't making record highs despite the fact Europe is in its worst chapter yet of its sovereign debt crisis. "Frankly, the fact that it's not trading at $1,900-plus is a worrisome sign to me."
"Gold is seen as rallying if the situation is resolved and the European Central Bank prints money to assuage everybody. I think volatility is what we are going to be looking for for the next several months or so, but that after February gold has a bit of a problem." Nadler thinks that high gold prices are overdependent on investment demand. Investors tend not to buy gold in the first few months of the year. If that is coupled with a slowdown in physical demand in China, which will also enter a seasonally slow buying period, gold could take a hit. "We are left with having to depend on crises," Nadler says.
"I think you could argue that gold could be trading as low as the $1,200-$1,300 level if it were not for some safe-haven demand that came into the picture in the third quarter but right now when it is most needed it's not there," Nadler says.
Gold, however, continues to find support from negative real interest rates -- the interest rate minus the inflation rate -- around the world as money in the bank is worth less and people buy gold as a wealth preserver. European Central Bank President Mario Draghi said Friday that the downside risk to the economic outlook has increased and weaker activity could moderate any price pressures. This could mean that the ECB will continue slashing rates.
At his first central bank meeting as president, Draghi cut rates by 25 basis points to 1.25%, and weak growth and downward pressure on inflation could lead to more cutting. Inflation in the Eurozone is currently 3%.
The short-term outlook for gold is nonetheless murky at best. The market is still trying to shake out the aftereffects of MF Global's bankruptcy, with traders unable to pony up more cash to trade their future positions at another firm possibly liquidating some positions. Margin requirements at the CME -- the amount it costs to trade a futures contract -- had been suspended for MF clients but were re-installed on Thursday, further pressuring gold prices as traders needed cash.
Buying remains scarce Friday as traders even out their positions heading into the weekend and a shortened holiday week, not wanting to be caught betting heavily on or against gold.
After getting crushed in Thursday's sell-off, gold mining stocks extended losses Friday. Barrick Gold (ABX) closed down 0.9% at $48.84, while Randgold Resources (GOLD) dropped 2.8% to $111.01. Goldcorp (GG) slipped 0.8% to $50.57, and AngloGold Ashanti (AU) lost 0.9% to finish at $45.16.
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