Gold Prices Falter, Despite Crisis in Egypt

NEW YORK ( TheStreet) -- Gold prices struggled Monday as technical selling and the need for cash overcame safe haven buying.

Gold for April delivery ended down $7.20 to $1,334.50 an ounce at the Comex division of the New York Mercantile Exchange. The gold price today traded as high as $1,347.20 and as low as $1,323.60. The spot gold price was losing $8, according to Kitco's gold index.

The U.S. dollar index was shedding 0.43% to $77.80 while the euro rallied 0.4% to $1.36 versus the dollar.

Gold popped 1.7% Friday on a variety of factors, the strongest being an explosion of protests in Egypt that turned violent. Although steps were taken over the weekend to force President Mubarak out of office in a more peaceful way, the unrest is far from over.

What is preventing gold from fulfilling its primary role as a safe haven asset is complicated. First, after a big rally Friday, investors are taking profits and perhaps rotating into cash. Also, with futures slightly higher, it seems investors are feeling more confident about how the Egypt crisis is unfolding and are willing to put money to work in stocks.

"Any investor that had been long from higher levels is considering lightening up a bit," says Phil Streible, senior market strategist at Lind-Waldock. "The key level of support is around ... $1,310 ... but I think there is no doubt that prices will move up to the 50-day moving average."

Another factor crimping gold prices was continued technical trading. One reason gold moved on Friday, which was overshadowed by the events in Egypt, was the fact that many traders thought gold prices hit a bottom. The massive fund selling by SHK Asset Management earlier in the week signaled to many that capitulation is over; that the fast money was out of the market and gold found its bottom. Although it might be too soon to call the end of capitulation, it is still starting to filter through the markets.

Gold had corrected 7.5% in 2011 and the selling is continuing. The SPDR Gold Shares ( GLD) dropped 2.4 tons on Friday, making gold's rally Friday look like a weak bounce versus another leg higher. The consensus among traders and analysts is varied.

Jeb Handwerger, editor of GoldStockTrades.com, thinks that gold will hit $1,600 on contagion in the Middle East, while David Banister, chief investment strategist at ActiveTradingPartners.com, thinks that gold prices have bottomed but that higher prices may be far off.

>> Video: Gold Prices Have Bottomed, Says Trader

"I believe it will take many months for us to get back past $1,430. We may not surpass $1,430 until much later this year, early next year," says Banister. "But I'm looking around for $1,510 - $1,520 as the next likely top." Banister is recommending that investors scale into their gold position and then add more if gold pulls back to the $1,285 support area.

The spot gold price should hold up better than the futures market as physical buying supports the gold price. China starts its New Year holiday on February 3rd, which gives consumers a reason to buy gold.

In addition, there are a slew of factors that could prompt another flight to safety. If violence ramps up Egypt or if the political situation isn't resolved, gold will become attractive to investors.

A million man march is scheduled for Tuesday and if Egypt shuts down the Suez canal, investors could flee to gold. Already reports indicate that banks in Egypt are running out of cash, which strengthens gold's case as a form of money during times of crisis.

Moody's also downgraded Egypt's credit rating from Ba1 to Ba2 with a negative outlook, but gold has been shrugging off these rating downgrades of late. Japan's downgrade last week did little to lift prices.

Inflation worries are also making headlines again with the European Union reporting 2.4% inflation in December. High food prices are cited as one of the underlying factors triggering social unrest throughout North Africa and the Middle East. Although gold thrives on an inflationary environment, it could have the adverse effect of forcing countries to raise interest rates sooner than expected.

Higher rates are typically bad for gold prices although keep in mind it would take several severe rate hikes in Egypt, for example, to tame its 10% inflation rate.

"I think we are seeing a rotation out of gold and gold equities and into the broader market under the assumption that the economy is going to grow and that jobs will start to be gained," says Brian Hicks, co-manager of the U.S. Global Investors Global Resources Fund. "I think there's still a lot to be proven here." Hicks is bullish on gold due to the "excessive debt levels" globally.

Silver prices closed up 25 cents to $28.16 while copper was up 8 cents to $4.46.

Most Recent Quotes from www.kitco.com

Gold and silver mining stocks, a risky but profitable way to buy gold, were mixed. Gammon Gold ( GRS) was down 1.72% at $7.45 while Silver Wheaton ( SLW) was slipping more than 2% at $30.71. Other gold stocks Iamgold ( IAG) and Freeport McMoRan Copper & Gold ( FCX) were trading at $19.11 and $107.77, respectively.

-- Written by Alix Steel in New York.

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