Gold Prices Reclaim Rally

Gold prices increased today and broke above key technical levels as the dollar weakened. The dollar drifted lower on news that Fitch reaffirmed France's triple A rating taking away some uncertainty in the euro zone.

By Alix Steel
01/10/12 - 10:51 AM EST
The Street

NEW YORK (TheStreet ) -- Gold prices were following stocks higher Tuesday as the dollar weakened and prices broke above key technical levels.

Gold for February delivery was adding $28.20 at $1,636.30 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,641.40 and as low as $1,609.20 an ounce while the spot price was up $23, according to Kitco's gold index.

Silver prices were adding $1.22 at $30.01 an ounce while the U.S. dollar index was shedding 0.18% at $80.84.

Gold prices were gaining steam as investors bought back previously sold positions and as momentum traders jumped in after gold broke above its 200-day moving average, its most watched technical level.

"We do need to close above $1,635 to really cement being in the midst of this range," says Stan Dash, vice president of applied technical analysis at TradeStation. Dash notes that a lot of the rally in gold happened overnight, triggering short covering in the U.S. markets. "We haven't really moved that much since the U.S. trading banking day began. We've been steady." Dash thinks this is a signal to be cautious.

Gold got an extra boost Tuesday as the dollar drifted lower on news that rating agency, Fitch reaffirmed France's triple A credit rating. Investors have been waiting for a downgrade from Standard & Poor's and were worried other agencies would follow suit. Fitch's affirmation removed part of this cloud of uncertainty.

Investors now must contend with debt auctions in Italy and Spain later this week. The interest rate Italy must pay to borrow money for 10 years is now over 7%. If costs balloon, it could hurt the euro, stocks and gold.

The euro is slightly stronger Tuesday, up 0.06% versus the dollar, but nowhere near gold's strength with prices up 1.7%. "The disconnect between euro and gold leads me to believe that there may be some safe haven buying," says Anthony Neglia, president of Tower Trading, but he is still cautious. "At the end of the day, I am long term bullish, but still would like to see more volume committed to the direction."

Dash, on the other hand, thinks that stocks and gold are still moving in tandem. "In the first 35 minutes of trading, the stock market backed off a little bit and so did gold. It backed off $5-$6 an ounce." Dash thinks that means gold is trading as a commodity, a riskier asset, versus a currency or a safe haven.

"We can't put Europe aside," argues Dash, "although it seems that despite our worries the markets are giving us a positive reflection of events in Europe ... markets are saying that they are not worried about [Europe's upcoming debt auction]."

Waiting in the wings as a driver for gold are growth concerns out of China. The International Monetary Fund lowered 2012 global growth forecasts to 4% and China's growth to 9%. China and India account for 40%-50% of annual global gold consumption and if growth slows too much so might demand for gold.

China's December trade data slowed to a 2-year low, but the country still imported 5% more oil year-on-year during the month and 12.6% more copper month-on-month. Chinese banks lent out 640.5 billion yuan in new loans in December, more than expected, and 7.48 trillion yuan of new loans in 2011, which means that pumping more money into the system is front and center for the emerging market country.

"M2 growth has accelerated to 13.6% year-on-year in December on the back of the faster loan growth," wrote Credit Suisse in a recent note. M2 is the total money supply and an economic indicator used to forecast inflation. "We suspect M2 growth is close to its bottom in the fourth quarter of 2011, and is likely to stabilize or mildly accelerate going forward."

Any signs of easing or more money in the system is a positive for gold. When inflation, now at 4.2%, outpaces interest rates, now at 3.5%, money in the bank loses value which makes gold more attractive as an alternative asset. The latest import data for China shows that the country imported 85.7 tons of gold from Hong Kong in October alone. "We think imports into China could be 400 tons this year," says Marcus Grubb, managing director at the World Gold Council, which means China might be on track to consume 747 tons of gold in 2011.

Gold mining stocks closed lower Friday. Barrick Gold(ABX) was adding 1.61% at $48.48 while Newmont Mining(NEM) was rallying 2.11% at $62.78.

Other gold stocks, Goldcorp(GG) and NovaGold(NG) were trading higher at $45.46 and $9.12, respectively.

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