Gold Prices: Correction or Time to Buy?


NEW YORK (TheStreet) — Gold prices Tuesday were dragged down by profit-taking and an ardent return of risk appetite.

Gold for February delivery was shedding $36.40 to $1,386.50 an ounce at the Comex division of the New York Mercantile Exchange. The gold price Tuesday has traded as high as $1,417.80 and as low as $1,385.60.

The U.S. dollar index was down 0.05% to $79.18 while the euro was flat at $1.33 vs. the dollar. The spot gold price Tuesday was down $26, according to Kitco’s gold index.

A new year is bringing further positive economic data and has triggered a rush into riskier equities leaving gold somewhat abandoned.

“Short term, the threat of profit-taking corrections remains,” says James Moore, research analyst at fastmarkets.com, as investors lock in gains and put the money to work in stocks.

The slew of good news keeps piling up: Jobless claims hit their lowest point in almost two and a half years; the Federal Reserve’s $600 bond-buying program; an extension of tax cuts and business incentives; a low volatility reading for the markets; and stronger-than-expected manufacturing data out of the U.S. and U.K.

Worries over sovereign debt in Europe and tensions between North and South Korea have eased, limiting gold’s appeal as a safe-haven asset. Investors seem much more interested in focusing on the Dow Jones Industrial Average’s strong showing Monday that pushed the index to a 28-month high. Investors were wobbling on their stock interest, but kept selling gold nonetheless.

But Tuesday’s price dip could also unearth “bargain-hunting” buying from money managers who sold gold at the end of 2010 and are now looking to buy back positions.

“There’s going to be a lot of investor inflows and also asset allocation,” argues Phil Streible, senior market strategist at Lind-Waldock. “I think that any significant weakness throughout the course of this week should be met with quite a bit of buying.”

This so-called January effect for gold doesn’t always pan out. In 2010, gold price slid from $874.50 to a low of $810 mid-month before climbing 3.7% higher in February.
Gold prices must also contend with the potential of a stronger dollar. Improving risk appetite has prompted investors to abandon U.S. Treasuries, usually thought of as a safe-haven asset, which has pushed yields higher as the government sweetens the pot to entice investors. The yield on the 10-year note was rising to 3.35% making the dollar worth more.

Gold and the U.S. dollar tend to move inversely to each other, although this trend isn’t foolproof. Any significant strength in the currency would temper gold’s upside.

This downward trend could continue with better economic data perhaps signaling higher interest rates in the near future, but there are other factors that should be supportive of higher prices.

First, improving industrial data is good for industrial metals like silver, platinum and palladium and gold will probably rise on the back of their rally. Although its upward momentum might pale in comparison, gold rallied 26% in 2010 while silver popped 80%, the interest in precious metals in general should help support prices. The silver market is less liquid than gold which leads to more violent price swings.

Also, the fact is that most investors and money managers don’t own gold. Jim Cramer pointed out in a recent article on RealMoney.com that gold is less than 1% of the average fund manager’s portfolio worldwide and that gold prices “will not peak until it represents something like 5%, much more the historic mean.”

Cramer owns junior miner NovaGold(NG) for his charitable trust, ActionAlertsPlus , and said recently he fruitlessly tried to buy gold coins, despite the fact that the U.S. Mint said American Eagle one-ounce gold coin sales tanked 53% in December month over month.

Streible recommends that investors “dabble in on the long side” when prices sink to $1,400 or $1,380 an ounce. He cites resistance at $1,432 and $1,445.

Streible says that debt worries out of Europe won’t be resolved anytime soon. Despite improving employment reports in the U.S., growth is still anemic, which many analysts predict will prevent the Fed from raising rates.

A higher-than-expected inflation reading in the eurozone, although largely ignored Tuesday, also underlines the threat of rising inflation. Year-over-year inflation in the eurozone was up 2.2% vs. 1.9% in December. The reading will no doubt put some pressure on the European Central Bank to take a second look at the inflation risk — benchmark rates have been at 1% since May 2009.

Although higher than expected, the eurozone rate is minimal compared to China’s 5.1% inflation reading and underscores that developed nations not just emerging ones could start to see inflation in the future.

Gold is the prime investment during times of inflation, or fear of inflation, as a form of money that retains more value than paper currencies.

George Kleinman, president of Commodity Resource, also points out that a rising yeild on U.S. Treasuries can be viewed as inflationary. “Why would you lend money to the government for five years or 10 years or 30 years at historically low rates when you’re worried about inflation heating up?”
Silver prices were shedding $1.07 to $30.05 while copper was down just 1 cent at $4.44.

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