Investor Demand Of Gold High In Antipation Of Federal Reserve Action

Gold prices grew by nearly double their average rate in September, as investors increased their gold holdings. With analysts expecting gold prices to stay at above $1300 an …

Gold prices grew by nearly double their average rate in September, as investors increased their gold holdings. With analysts expecting gold prices to stay at above $1300 an ounce during the fourth quarter, expectations are high that silver prices should see significant growth during the final quarter of 2010. See the following article from The Street for more on this.

Gold prices surged past $1,300 an ounce Wednesday largely on technical trading and a weak dollar. The real test of the recent rally will come Friday when the fourth quarter begins.

Gold for December delivery settled up $2 to $1,310.93 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded as high as $1,314.80, another record, and as low as $1,306.10 on Wednesday.

The U.S. dollar index was losing 0.30% to $78.77 while the euro was rising 0.26% to $1.36 vs. the dollar. The spot gold price Wednesday was up 20 cents, according to Kitco’s gold index, as traders opted for futures contracts over the physical metal.

There is no doubt that gold’s rally in September has been impressive. The fall is typically a seasonally strong buying period for gold as a slew of festivals and weddings in China and India spur gold jewelry purchases. Frank Holmes, CEO¬† of U.S. Global Investors, says that on average the gold price moves 2.5% higher in September; so far prices have rallied 5% in the month.

The majority of the momentum has actually come from investment demand, not jewelry demand. The gold exchange-traded fund, SPDR Gold Shares(GLD_), currently holds 1,305.68 tons of gold as investors buy and hold the precious metal.

Investor buying has been triggered by consistent signs that governments around the world will intervene in the currency markets to keep their respective currencies low to help export demand and facilitate a sustainable economic recovery.

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“Every currency block is determined to help its export growth by weakening [its] currency,” says Dean Curnutt, head of Macro Risk Advisors.

The Bank of Japan, struggling to contain the yen’s rapid rise, took steps to depreciate its currency. Pressure is mounting for China to let the yuan appreciate more quickly.

Although the euro is holding up relatively well, worries that Moody’s might downgrade Spain’s credit rating after lowering Anglo Irish Bank to just above junk status have many investors predicting that tax increases and spending cuts won’t be enough to save the struggling eurozone economies, that it’s just a matter of time before the weaker nations tap the European Union/International Monetary Fund joint bailout fund.

In the U.S., the assumption is that the Federal Reserve will print more money to buy more government bonds and will announce the measure in early November after its two-day meeting. There are still question marks as to how much money will be lent to the government and for how long.

As protection against weak currencies, investors buy gold. As the value of the U.S. dollar falls, gold becomes cheaper to buy in other currencies. Gold is also a form of money that retains value as it can’t be printed or manipulated as easily as fiat currencies.

“If the story starts to catch on and it doesn’t appear that it has caught on as significantly as it might,” says Curnutt. “Gold is the only currency proxy that has no central bank. Supply is fixed.”

But these fundamentals aren’t the only things currently moving the gold price. The real culprit is the end of the third quarter and technical buying. Money managers who want to show their clients they own gold especially at record-high prices are buying the metal as the third quarter comes to a close Thursday.

Open interest for the December gold contract on the Comex was more than 429,441 on Tuesday, according to data, which is a near record. “[But we have] record open interest of 619,000,” says George Gero, senior vice president and financial consultant RBC Capital Markets Global Futures “as all new buyers [come] to gold to hedge their exposure to various currrencies and to continue to asset allocate.”

Gero thinks support for gold prices is at $1,225 while resistance is firmly at $1,325 an ounce. He argues that gold will have to wait until the fourth quarter before that target can be firmly breached.

“We are due for some kind of correction. There’s a lot of weak longs that have gotten involved in this party in the last few weeks,” says Phil Streible, senior market strategist at Lind-Waldock. “I think those longs need to be washed out in order to start a new fresh run up.”

Silver prices closed 24 cents higher to $21.95 Wednesday moving the gold/silver ratio to just under 60.

Back in 1980 when gold and silver were both at their then-record highs of $850 and $50, respectively, the ratio was 17. By that math, silver prices should be $77. Most experts don’t believe the metal can rally that much, but that $25 or $30 silver for the long term is very realistic.

“Twenty-five is the trigger point … this is where I believe silver will accelerate once silver gets above $25 and stays there for several days in a row,” says David Morgan, founder of Silver-Investor.com. “If we hit $25 and break through it then you can see $30 in a matter of a couple of months or maybe even a couple of weeks.”

Gold mining stocks, a risky but potentially profitable way to buy gold, were mostly higher.

Yamana Gold(AUY) was up 0.79% to $11.54 while Freeport McMoRan Copper & Gold(FCX) was losing 1.21% to $85.98 after investors worried that two earthquakes near the coast of Papua, Indonesia might have hurt production at its Grasberg mine in the region. Other large gold stocks New Gold(NGD) and Gold Fields(GFI) were trading at $6.70 and $15.19, respectively.

This article has been republished from The Street. You can also view this article at
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