Reports Of Gold Bar Shortages Helps Gold Increase

Following positive news in Portugal, gold prices remained in limbo on Wednesday, following a double digit rally on Tuesday. While some speculate that traders could push the price …

Following positive news in Portugal, gold prices remained in limbo on Wednesday, following a double digit rally on Tuesday. While some speculate that traders could push the price of gold lower, this could be offset by high demand for gold bars in Asia. See the following article from The Street for more on this.

Gold prices traded aimlessly on Wednesday after Portugal raised money without a hitch.

Gold for February delivery settled up $1.50 to $1,385.80 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded in a relatively tight range however, running as high as $1,387 and as low as $1,376.30 during Wednesday’s session.

The U.S. dollar index was down 0.85% at $80.13 while the euro was adding 1.19% to $1.31 vs. the dollar. The spot gold price was adding $5.90, according to Kitco’s gold index.

Anxious investors had piled into gold on Tuesday as protection against sovereign debt fears in Europe. On the top of the list was the worry that Portugal wouldn’t raise enough money Wednesday or would have to do so at high rates.

Neither of those scenarios really panned out and gold floated listlessly all day. The country borrowed €1.2 billion over four and 10 years. Portugal’s short-term borrowing costs rose to 5.39% but its longer-term costs, helped by European Central Bank bond buying, dropped to 6.71%.

The sale helped ease the pressure on Portugal to take bailout money from the International Monetary Fund and European Union. Although the situation is far from optimistic, it is no longer dire. The euro got a boost which weighed on the dollar and helped gold.

Gold staged a rally Tuesday closing up double digits, the first time the metal breathed a sigh of relief in the new year. The rise might have prompted some traders to take profits earlier in Wednesday’s trading.

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“Momentum driven traders in the gold pits could push gold lower,’ says Mark O’Byrne, executive director of Goldcore, an international bullion dealer, broker and wealth manager.

The gold spot price is holding up better than the gold price in the futures market which indicates more physical buying. O’Byrne says what will hold up the price is strong physical demand from Asia as consumers buy gold below $1,400 in U.S. dollar terms.

“There are increasing reports of shortages of gold bars and premiums have risen to two-year highs. This is leading to consolidation close to record nominal highs in all fiat currencies,” he says.

Typically Asian markets are very price sensitive but analysts see this constraint mattering only when gold hits a high. On any correction, buyers come back into the market. Frank Holmes, CEO of U.S. Global Investors, calls this pattern the “love trade.”

“Their incomes are rising at 8% a year in these countries. You have money supply growing at 15% a year … The big difference in these countries is when you buy gold its only a 10% mark-up for 24-karat gold that hour here it’s a 400% mark-up.”

Holmes says that 60% of demand for gold is driven by the love trade, despite the fact that investor demand — the “fear trade” — has outpaced jewelry demand over the last two quarters.

When there is a huge spike in the price of gold, the love trade falls off and that’s when investment demand tends to take over, but the reverse is also true. When there is a deep enough correction, physical buyers jump in offsetting weak investment inflows.

O’Byrne confirms that a “paper-driven selloff in the futures market will likely be greeted lustily by physical buyers who continue to buy on the dips.”

Industrial metals also got a boost in after-hours trading. The Federal Reserve’s beige book report showed that economic activity continued to rise in all its 12 districts in 2010 which bodes well for this year’s recovery.

Of course, a stronger recovery would take the QE3 debate off the table, which the Fed has until June to decide on when QE2 runs out. This move would hurt gold but support industrial “recovery” metals.

Silver prices added 4 cents to $29.54 while copper closed up 6 cents to $4.41.

Traders like Jeb Handwerger, editor of, is actually betting on mining stocks to cash in on high gold prices. “Gold may move laterally or sideways or correct for the next few weeks but mining stocks could significantly outperform,” he says.

The Detroit auto show was also gaining a lot of investor interest benefiting platinum and palladium which are both used in catalytic converters. Platinum was adding more than $32 to $1,803 while its cheaper brother palladium was up $25.50 to $809.25.

Gold mining stocks, a risky but potentially lucrative way to buy gold, were mixed. Kinross Gold(KGC) was 0.23% lower at $17.65 while Freeport McMoRan Copper & Gold(FCX) was up 0.35% at $121.73. Other gold stocks Gold Fields(GFI) and New Gold(NGD) were trading at $17.24 and $9.32, respectively.

NovaGold(NG) was also surging 4.82% to $14.36 after Jim Cramer spoke with the CEO Rick Van Nieuwenhuyse on Mad Money who highlighted the company’s big exposure to copper at Galore Creek.

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