Gold Prices Settle Down on Profit Taking

NEW YORK ( TheStreet ) -- Gold prices lost steam Friday as investors took profits headed into the weekend.

Gold for April delivery settled down $8.70 to $1,426.20 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,438.10 and as low as $1,422 while the spot price was shedding $2.70, according to Kitco's gold index.

Silver prices lost 32 cents to settled at $37.04 an ounce.

Gold and silver were pulled between those investors seeking protection headed into the weekend and those who took profits after the metals' rally this week. But the latter won out and gold turned sharply lower before markets closed.

Both metals should brace for volatility over the next week. The CME announced Thursday that the amount of money to either buy or short a 5,000-ounce silver contract will rise 5.4% to $11,745, which could cause some anxiety among traders and force them to alter some positions. When silver is hit with a margin requirement, the worry is that gold could be next.

George Gero, senior vice president at RBC Capital Markets, doesn't think the requirement will affect the silver market because buying silver exchange traded funds come with an even bigger margin.

"An ETF you have to put up at least 50% margin or full money if you're buying it in a tax sheltered account or a retirement type account," argues Gero.

Another technical factor that will dominate precious metal trading is rebalancing. The first quarter wraps up Thursday and portfolio managers will be under the gun to prove they own certain stocks or commodities to then just ditch the position in the second quarter. Portfolio managers who have owned gold and silver might also be tempted to sell to take advantage of recent rallies.

Gold and silver were hit hard by this kind of trading in January. Both metals rallied 2.7% and 14%, respectively, in December as portfolio managers beefed up their precious metal holdings. But come January gold shed 6.6% and silver dropped 10%. Both have recouped their losses since then with gold hitting a record intraday high of $1,448.60 and silver hitting its own 31-year high of $38.18 an ounce.

Traders on the Comex also must decide if they should roll over their April contracts to June, sell, or let them expire, which creates a more volatile trading environment.

Volatility doesn't stop with technical trading. The headline news stands to keep gold and silver in a rocky environment with Libyan leader Moammar Gadhafi holding on to power, protests in Yemen and Syria heating up and Portugal's government in disarray.

Standard & Poor's downgraded the country's long-term credit rating to BBB from A- after the country's austerity plan was rejected.

James Moore, research analyst at FastMarkets, says the backdrop for gold and silver "suggests further gains in the coming sessions with gold to erode resistance around $1,450 and silver to extend towards $40-41 as the metal continues to be seen as a cheaper."

Jeb Handwerger, editor of GoldStockTrades.com, thinks that gold can still hit $1,600 and silver $40 within the next few weeks. Handwerger had been calling for $1,600 gold since the Egyptian crisis erupted in late January. "There will be corrections, there will be times of stalling out, but the trend is intact .... and gold is about to follow silver higher."

According to Michael Haynes, CEO of American Precious Metals Exchange, an online precious metal dealer, demand is exploding.

"Last year we pushed out 150,000 packages containing about 7.5 million different units of precious metals .... This year through the March quarter so far we are running at a pace about 100% greater than last year," he said.

Haynes said his company ships precious metals to 23 countries and that the biggest change from 2010 to 2011 is silver. "Silver is a big change in terms of a number of units shipped ... many many more new people are coming into the market ... and expanding into silver in a big way."

Haynes said new buyers opt for gold but that silver is the metal of choice for investors who don't have a ton of cash to spend or for those who already own gold and are looking for even more exposure to the precious metal sector.

"I think we are barely scratching the service in terms of the number of new investors ... who are looking for an allocation into the precious metal complex," Haynes said.

Gold mining stocks, a risky but profitable way to buy gold, were mixed. Yamana Gold ( AUY) was 1.59% lower at $12.41 while Harmony Gold ( HMY) was down 2.15% to $14.08.

Other gold stocks, New Gold ( NGD) and Gold Fields ( EGO) were trading at $11.30 and $16.91, respectively.


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-- 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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