Gold Prices Continue to Drop

NEW YORK ( TheStreet) -- Gold prices were down in the dumps again on Thursday as investors continued to sell the yellow metal for riskier assets.

Gold for February delivery bounced off session lows but still shed $2 to $1,371.70 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded as high as $1,380 and as low as $1,364.30 during Thursday's session. Despite the price drama, gold was able to hold to its $1,370 support area.

The U.S. dollar index was adding 0.63% to $80.79 while the euro was losing 0.96% to $1.30 vs. the dollar. The spot gold price was down $7.30, according to Kitco's gold index.

Three times gold prices have tried to break to and sustain new highs but to no avail, with 2011's 3.4% correction continuing.

"The high volume distribution and failed breakouts into new highs is indicating institutional selling," says Jeb Handwerger, editor of Handwerger says a break below the 50-day moving average could trigger more sell orders, where traders are forced to sell to lock in profits, and prices could trend down to $1,275-$1,250.

Like other traders, Handwerger is holding long-term positions but selling the rest and will only buy gold again once the correction shakes out. Without this new money in the market, gold prices will have a tough time stabilizing.

Gold's downward trend started as profit-taking turned into technical selling and has now morphed into a return to risk appetite as better than expected data leaves safe have metals on the sidelines.

November manufacturing orders in Germany climbed 5.2% vs. a prior 1.9%. The jump blew past expectations. The news trumped weak retail sales in the eurozone for the same month as well as the U.K.'s weaker purchasing managers index for December, which slipped below the growth level of 50.

An improving jobs picture in the U.S. has also not helped gold. Initial jobless claims for the week ending Jan. 1 rose slightly to 409,000, but expectations are still high headed into Friday's jobs number. The unemployment rate is expected to slip slightly to 9.7% and where the private sector is expected to add anywhere from 225,000 to 162,000 jobs, according to

What remains largely ignored and could help gold prices find support is recurring signs of inflation outside the United States. Aside from prices rising in the U.K. to 5.5% in 2010, India reported that food inflation popped to 18.32% in late December vs. a year ago.

Although the U.S.'s inflation reading is low, the core consumer price index is up only 0.6% year over year, some companies are starting to feel the pain of higher costs.

Packaged food company ConAgra ( CAG) reported a 16% fall in profit in part because of rising commodity prices, and the company's CEO, Gary Rodkin, even sees cost inflation accelerating.

The U.S. dollar of late has not been factoring in any inflation panic, but Axel Merk, president of Merk Investments, sees a weak U.S. dollar, which has been "only masked by a wobbling euro. ... Overall, we see the world as increasingly unstable."

Aside from the fundamental landscape, investors appear to be transitioning out of gold especially as the dollar gains ground.

Jon Nadler, senior analyst at, warned of an investor sea change and that since "investment has in fact become the dominant and most manifest component of the gold market equation" radical and fast downward momentum could result.

Gold's recent sell-off could point to the so-called "hot money," trader money, coming out of the market. Nadler believes that gold is in store for a more fundamental shift near the end of 2011.

It's not like investors are abandoning metals altogether, but instead seem to be moving from gold and into the so called "recovery" metals like platinum and palladium.

Barclays Capital notes in its daily commodity briefing that "gold ETP holdings fell by 3.4 tons Wednesday to 2133.7 tons across the 24 physical products they track." PGM holdings however grew to set a fresh record high.

Will Rhind, head of U.S. operations for ETF Securities, says that there have been no major outflows from its ETFS Physical Gold Shares ( SGOL), but there have been more inflows into ETFS Physical Precious Metal Basket ( GLTR), which holds gold, silver, platinum and palladium, and ETFS Physical White Metal Basket ( WITE), which concentrates only on silver, platinum and palladium.

"People are naturally thinking yes gold still represents an opportunity for an investment ... however there are other opportunities in precious metals as well."

Silver prices have traded more with gold down more than 5% for 2011 and was down 7 cents at $29.12 while Copper was 7 cents lower at $4.33.

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Gold mining stocks , a risky but potentially lucrative way to buy gold, were in a world fo hurt. Kinross Gold ( KGC) was 1.63% lower at $17.51 while Freeport McMoRan Copper & Gold ( FCX) fell 1.91% to $116.09. Other gold stocks New Gold ( NGD) and Gold Fields ( GFI) were trading at $9 and $16.75, respectively.

Randgold Resources ( GOLD)did receive an upgrade to buy from hold at Citi, despite a lowered price target and shares had moved almost 2% higher to $79.70.

-- Written by Alix Steel in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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