Gold Prices End Week 4% Higher (Update 1)

Gerald Chen-Young, chief investment officer at the United Negro College Fund, which invests in the metal, says that gold is too important in Indian culture to have them stop buying gold all together. "It has industrial use and an aesthetic use ...they will continue purchasing gold."

"The move by the Fed signaled to the market that thing were much worse than previously thought," says Chen-Young, "and things will remain that way. Gold is a natural beneficiary of capital flows during time where things are not so good." He thinks that the disinflation and deflation worries that follow long periods of deleveraging, like the one we are in now, are already priced into the gold market. What isn't priced in yet is large scale buying by central banks and big institutional money managers looking to diversify their holdings.

"Gold is behaving like an asset class," says Chen-Young, "so with the uncertainty from the euro central banks large institutional managers are diversifying their holdings and gold has become increasing a component of reserve holdings."

Gold as a store of value can be seen today by looking at the physical market, where prices are climbing faster than those on the futures market. Futures traders are regrouping after Thursday's options expiration, but worries are not surfacing over margin hikes. When futures markets see big spikes, the CME can raise the amount of money traders must shell out to buy a futures contract. It serves to shake out speculators from the market and curb volatility.

If prices launch a fast run to $2,000, the CME might take action. "Should the CME take strong action on margins and trade size, then gold could hit a hard stop," wrote Global Hunter Securities in a recent note. "Should this occur, then there is the risk that gold might fail to regain the $1,700 level until much greater dysfunctions were to occur in inflation and the debt in the United States."

In August and September of 2011, the CME hiked margins by 54%, which was a big trigger in gold's subsequent 18% selloff through year end. "At the same time, if gold maintains its trend somewhere along the $1,600 to $1,700 level for at least three months," says Global Hunter Securities, "then the pressure on exchanges to crack down on speculative trades at $1,900 might diminish."

Gold mining stocks were rallying Friday. Kinross Gold(KGC) was up 2.72% at $11.72 while Yamana Gold(AUY) was 2% higher at $17.41.

Other gold stocks, Agnico-Eagle(AEM) and Eldorado Gold(EGO) were up at $39.24 and $15.04, respectively.

NovaGold(NG)was climbing more than 7% to $10.72 after news broke that Vanguard Precious Metals and Mining Fund holds an 8.9% stake of outstanding shares.

--Written by Alix Steel in New York.

>To contact the writer of this article, click here: Alix Steel.

Related Articles:

How to Invest in Gold

Do Gold Prices Have Room to Rise?

>To order reprints of this article, click here: Reprints