Gold backs off highs as investors await debt deal

Prices waver as markets wait to see whether US lawmakers can avoid a default.

By TheStreet Staff Jul 28, 2011 11:02AM

Gold © Comstock Images/Jupiterimagesthe streetBy Alix Steel, TheStreet


Updated at 3:45 p.m. ET


Gold prices backed off record highs Thursday as investors awaited a debt deal from Congress.


Gold (-GC) for December delivery, the most actively traded contract today, slipped $1.10 to settle at $1,616.20 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,622.80 and as low as $1,605, while the spot gold price was last lup $1.40, according to Kitco's gold index.


Silver (-SI) prices dropped 77 cents to $39.79 an ounce. The U.S. dollar index was adding 0.2% at $74.25, while the euro was shedding 0.4% against the dollar.


EU debt fears were trumping U.S. debt fears for the moment, which was helping the dollar, after Standard & Poor's lowered Greece's credit rating further into junk territory with a negative outlook, signaling more downgrades were possible. A surprising decline in the number of people filing for unemployment claims for the week ended July 21st was also boosting the US currency.


The stronger dollar and bargain-hunting in stocks were crimping any rally in gold, but prices were supported just below their record highs as a near-term default seemed possible. The House is set to vote on Speaker John Boehner's revised debt plan Thursday, although Senate Democrats have already united to block it.


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"There remains severe concerns (that) current deficit reductions are not enough to avoid default," says James Moore, a research analyst at FastMarkets, "with ratings agency Standard & Poor's requiring a $4 trillion reduction commitment over 10 years."


Moore thinks big investors are sitting on the sidelines, as a default would be uncharted territory for financial markets. There is the concern that in case of a default investors would dump and run from all assets, including gold.


The collapse of Lehman Brothers in 2008 provides a good example. From the beginning of September 2008, when reports of a Lehman bankruptcy circulated with force, until the end of 2008, the S&P 500 ($INX) sold off 36.1%, whereas gold lost 1.65%. In the first quarter of 2009, gold rallied more than 6%, while the S&P fell a further 12.96%.


A 2% decline for gold from current levels would put prices somewhere within the $1,575-$1,580 range, still record territory.


Tim Harvey, a senior vice president of ETF Securities, says gold will sell off a bit in the case of a default, "but how far it comes off is another matter." Harvey thinks it could be a case of gold retrenching and then going higher. "All we are trying to do now is fix how we are going to be able to spend a bit more cash, not how we are going to fix paying this huge amount of debt we have."


Gold mining stocks were mixed Thursday. Newmont Mining (NEM) was adding 0.7% at $57.74, while Agnico-Eagle (AEM) was tumbling 5.5% to $56.93, and AngloGold Ashanti (AU) was falling 1.4% to $42.20.


Goldcorp (GG) was sinking 3.5% to $49.11, after the gold miner beat earnings estimates but lowered its production guidance for 2011 to 2.5 million to 2.55 million ounces from 2.65 million to 2.75 million ounces. The lowered expectations are primarily due to a lack of gold production at Pueblo Viejo in 2011 and reduced production estimates from its killer silver mine, Penasquito.

Losing 100,000 ounces of production at Penasquito is particularly painful for Goldcorp because the massive amounts of silver could be sold to offset the cost of producing gold. Cash costs are now expected to rise to $500-$550 versus $475-$500 an ounce for 2011. Goldcorp had planned to grow its production by 60% over the next five years.


Barrick Gold (ABX), the largest gold producer in the world, was trading 0.9% lower to $48.10 despite faring better, beating analysts' estimates by 5 cents. Barrick announced that it was on track to meet its 2011 production guidance of 7.6 million to 7.8 million ounces at total cash costs of $450-$480 per ounce, lower than Goldcorp's. Barrick owns 60% of Goldcorp's Pueblo Viejo mine. The gold behemoth aims to produce 9 million ounces of gold in five years.




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