Gold Gives Up Most of Early Gain
Updated from 3:23 p.m. EDT
Gold prices rallied to all-time highs again Monday following emergency action by the
Federal Reserve
to steady the credit markets and rescue 85-year-old investment bank
Bear Stearns
(BSC)
from near destruction.
But the need by big investors to raise cash meant most of the gains were reversed by the time the market closed. Benchmark futures contracts edged up $3.10 to close at $1,002.60 an ounce on the Comex division of the New York Mercantile Exchange. Earlier in the session, the price reached an all-time high of $1,033.90 before retreating.
"Some hedge funds are finding they need to raise cash to cover margin calls on other investments," says George Gero, vice president of Global Futures at RBC in New York. "And what they can sell now is metals." As a result, the rally in gold futures was short-lived.
On Sunday, the Fed decided to cut the cost at which it would lend money to banks, the so-called discount rate, to 3.25% from 3.5% previously. The move is designed to ensure the overall banking system remains solvent and does not further threaten the health of what is seen as an increasingly shaky U.S. economy.
The Fed's move coincided with an announcement by
JP Morgan Chase
(JPM) - Get Report
that it would takeover beleaguered investment bank Bear Stearns for $2 a share. A year ago shares in Bear traded around $150.
As the financial market crisis has widened since last summer, investors have sought safe-haven investments such as gold. In the past month alone, the largest of the bullion exchange-traded funds that own inventories of gold bars,
streetTracks Gold Shares
(GLD) - Get Report
, has increased its holdings by over 20 tons, or almost $1 billion. The ETF now holds about 653 tons of the metal, or more than twice the level held by Britain's monetary authority, the Bank of England.
Despite the solid demand for the metal by investors, jewelry demand does seem to be suffering as a result of the higher price, says Jon Nadler, a gold analyst at Montreal-based bullion dealer Kitco.
Recent data from January show that India, traditionally one of the largest consumers of gold jewelry, saw imports of only around six tons this past January compared with 60-65 tons in the past, he says.
"And this is normally the peak buying season," he says.
In addition to curtailing the demand, the higher price of gold has also prompted many people to sell their old gold jewelry for scrap, boosting the overall supply of the metal.
On the technical side of things, Nadler says a price move back up to around $1,050 could see stiff resistance.
In the precious metals patch,
Newmont Mining
(NEM) - Get Report
and
Barrick Gold
(ABX)
were lower in recent activity, down 1.3% and 2.6%, respectively.
Know What You Own:
Bear Stearns operates in the financial services industry, and some of the other stocks in its field include
Citigroup
(C) - Get Report
,
Goldman Sachs
(GS) - Get Report
and
Morgan Stanley
(MS) - Get Report
. These stocks were recently trading at ($18.83, -4.80%), ($150.24, -4.21%) and ($36.02, -8.93%)respectively. For more on the value of knowing what you own, visit TheStreet.com's
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