Gold Dips on Dems' Gain

Hopes that gridlock in Washington will limit government spending aid the dollar and weigh on the yellow metal.
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Updated from 11:22 a.m. EST

Midterm election victories for the Democrats sent gold prices lower Wednesday, with the turn in power is seen calming anxiety over U.S. government spending. But observers see the pullback as a temporary phenomenon.

"If gold is an outlet for that tension, then that's bad for gold," says Bernard Hunter, director of precious metals at bullion bank ScotiaMocatta in Toronto. "But that is really a short-term factor."

December-dated contracts for gold slipped $9.40 to close at $618.30 an ounce on the Comex division of the New York Mercantile Exchange. The bullion exchanged-traded funds followed the futures prices down, with

streetTracks Gold Shares

(GLD) - Get Report

and

iShares Comex Gold Trust

(IAU) - Get Report

both moving about 1.7% lower recently.

A marginally stronger dollar early in the session helped grease the skids, taking gold down by about $4 an ounce by lunchtime. Prices for bullion and the greenback tend to move inversely.

However, bullion fell a further $5 after news that Defense Department chief Donald Rumsfeld would step down, despite a later partial reversal in the greenback. Rumsfeld was widely regarded as architect of the U.S.-led invasions of Iraq and Afghanistan.

The dollar was recently buying 117.735 yen, up from 117.70 yen late Tuesday. It was down against the euro, which was trading at $1.2775 compared with $1.2771.

Hunter says the climate change in Washington, D.C., won't eliminate either the huge Chinese trade surplus or the threat of global terror, both of which bode well for higher bullion prices in the longer term. The former will be bearish for the U.S. dollar, while the latter is likely to stimulate demand for gold as a safe-harbor investment in times of strife, he explains.

Other market watchers see higher oil prices between now and year-end boosting the prospects for inflation, something that has historically been bullish for gold. Oil is considered a primary driver for inflation, and many investors see gold as a long-term hedge against the withering effects of rising prices.

"We still have a tense situation with Iran, unrest in Nigeria, and it looks like

OPEC will adhere to the production cuts," says Brian Hicks, portfolio manager of the

(PSPFX) - Get Report

U.S. Global Investors Global Resources Fund.

In the official sector, the European Central Bank announced it has sold 101 million euros' worth of gold and receivables last week, or about 6.5 tons.

The weaker gold price weighed down on the gold patch with the Philadelphia Gold and Silver Index slipping 1.4% recently.

Bucking the downward trend, however, were shares of Denver-based miner

Royal Gold

(RGLD) - Get Report

, which were rallying about 1.5% after the company announced it would raise its annual dividend to 26 cents a share from 22 cents.

In Canada, Vancouver-based

NovaGold Resources

(NG) - Get Report

rejected a takeover offer from Toronto's

Barrick Gold

(ABX)

. Shares of NovaGold were trading down 0.4%, while those of Barrick were lower by about 2.8%.

In base metals, copper prices tumbled, with Comex December-dated contracts shedding 12.10 cents to close at $3.2445 a pound. Some observers, however, see a reversal on the cards.

"All eyes are on whether the Chinese will re-enter the market as strong buyers, having destocked over the summer," writes William Adams, an analyst at

Basemetals.com

in London. "If they do return to the market in force, then there may well be considerable upside left in copper."

Softer prices for the red-metal put pressure on the miners with shares of

Phelps Dodge

(PD) - Get Report

and

Southern Copper

(PCU)

recently declining 3.4% and 2.5%, respectively.

Also headed south were shares of diversified giants

Rio Tinto

(RTP)

, off 1.5%, and

BHP

(BHP) - Get Report

, lower by 1.9%.