Gold Prices Eke Out Gain as Europe Delivers a Plan

NEW YORK (TheStreet ) -- Gold prices climbed higher along with the euro in a volatile trading session as 26 European countries agreed to tighter fiscal union.

Gold for February delivery rose $3.40 to close at $1,726.30 an ounce at the Comex division of the New York Mercantile Exchange on relatively light volume. The gold price has traded as high as $1,727.90 and as low as $1,704.90, while the spot gold price was up $8, according to Kitco's gold index.

Silver prices added 71 cents to settle at $32.25 an ounce. TheU.S. dollar index was down 0.26% at $78.63.

All markets breathed a sigh of relief Friday after 26 of the 27 European Union nations agreed to tighter fiscal unity, giving up some sovereignty. Countries that don't meet deficit reduction targets or don't keep their budget deficits to 3% of gross domestic product will be penalized, but the details are still being worked out.

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Among the other highlights, euro countries will contribute 150 billion euros to the International Monetary Fund along with 50 billion euros from other European countries.

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The move increases the firepower of the IMF to help struggling European countries -- since European countries are not legally allowed to bail each other out. It might also prompt other countries like China to give more money to the IMF.

The permanent bailout fund, worth 500 billion euros, or European Stability Mechanism, will also be jump started in July 2012 and join the EFSF, or temporary bailout fund, which has 440 euros at its disposal.

Private bondholders will not be forced to take a hit and the ESM will not be a bank, which means it won't be able to borrow money from the European Central Bank.

The news was positive for the euro, which weighed on the dollar and helped gold, but the agreement was far from the euphoria many had been expecting.

"There's too much built on one side of the pond here in terms of optimism versus pessimism," says Jon Nadler, senior analyst at Kitco.com. "The dollar itself continues to be in very heavy demand among banks in Europe," which makes gold and the euros fate intertwined for now. Nadler expects a lack of clarity to drag on creating a murky environment for gold.

"The question for markets now will be whether they interpret the outcome as sufficient for the long term prosperity of the Eurozone," says James Moore, research analyst at FastMarkets. Moore says if the tone is positive then gold will benefit but that "a deeper rout remains if leaders fail to implement concrete plans to tackle debt."

Oliver Pursche, co-portfolio manager of the GMG Defensive Beta Fund, is continuing to buy gold on dips, but says that it is inflation that will eventually push gold substantially higher. "When you have so much retail and ETF interest [in gold] you're not going to trade on the fundamentals on the short term [but I] would not be surprised to see higher gold prices" longer term.

Pursche thinks Europe's concrete steps today is a glass half full scenario, but that volatility will remain and global inflation will take hold. China saw inflation in November fall to 4.2% from 5.5% the previous month. The bears will cry deflation and the bulls will cry stimulus. The low reading could pave the way for China to pump more money in the system either by lowering the amount of money banks must keep in their reserves, which it did last week, or by lowering interest rates, currently at 3.5%.

Although real interest rates are currently only a negative 0.7% -- interest rate minus the inflation rate - further easing will increase real rates. Gold typically does well when real rates are negative as cash in the bank is worth less and people look to the hard asset as a place to store wealth. Inflation worries can help to support gold longer term, but in the short term prices will still be euro dominated.

Gold mining stocks were rising Friday. Kinross Gold(KGC) was adding 1.29% at $13.34 while Yamana Gold(AUY) was up 0.94% at $16.14. Other gold stocks, Agnico-Eagle(AEM) and Eldorado Gold(EGO)were trading higher at $43.28 and $16.45, respectively.

--Written by Alix Steel in New York.

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