Gold Prices Flounder as U.S. Dollar Dominates Trading

Gold prices failed to claw their way higher, even as the dollar fell and inflation in the U.S. crept up to 3.9%.

Gold for December delivery closed down $5.80 at $1,647 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded as high as $1,666.90 and as low as $1,642.50 an ounce during the session, while the spot gold price was down $10, according to Kitco's gold index.

Silver prices were lost 8 cents at $31.74 an ounce while the U.S. dollar index was 0.24% lower at $76.96.

Gold is still at the mercy of currency volatility. The euro was gaining steam against the dollar a day after the U.K.'s Guardian newspaper reported that France and Germany had agreed in principle to expand the bailout fund, EFSF, to 2 trillion euros. The fund would not expand in cash amount, leaving money printing off the table, but would use leverage, providing the first line of defense against any bond losses from struggling Eurozone countries.

"Gold is trying to break away from that correlation [to the dollar]," says Will Rhind, head of U.S. operations for ETF Securities, "but is struggling ... We are looking for gold to try to reassert itself from a safe harbor perspective."

The dollar lost some steam after data showed inflation in the U.S. rose to 3.9% in September, which means that real interest rates are almost a negative 4%. Gold typically does well when rates are negative -- the interest rate minus the inflation rate -- as the dollar loses value, making gold more attractive as a store of wealth. Overall, however, it seems like investors are using the dollar as the safe haven of choice and gold was unable hold on to earlier gains.

"Minute-by-minute changes in headline news are causing see-sawing markets," says George Gero, senior vice president at RBC Capital Markets. That fate is unlikely to change anytime soon as Eurozone leaders prepare to meet October 23rd with a lot of pres! sure to "fix" Greece, banks and bondholders.

"We are looking for a bit of a catalyst," says Rhind of ETF Securities, "People who are not in gold who are looking to get into the gold market right now are ... sitting on the side lines. But I think the investors that are in gold or that have been in gold aren't really fazed by it."

ETF Securities has a slew of physically-backed products and Will says there has been no major shift in inflows or outflows in recent weeks. "The sentiment right now is people are waiting to see what happens and are repositioning themselves from a portfolio perspective ... [around] any other news over the next few weeks."

Ross Norman, CEO of Sharps Pixley, on the other hand, is worried gold might see another leg down. September's selloff "spooked [investors] by the state and manner of the decline and they are slow coming back in again."

With tensions high in Europe and the U.S., gold is acting in a very un-gold like way, its lost its safe haven appeal. "To some extent its making some investors sit on their hands ... the longer this goes on for the more you might see more long liquidation on the Comex."

The Comex, where commodity futures are traded in the U.S., has its own set of problems. The Commodity Futures Trading Commission voted to limit positions to 25% of deliverable supply. Norman doesn't think this will do anything do the gold price but it will move business overseas to Asia. Asia is ready.

The Shanghai Gold Exchange already exists but now investors can trade yuan denominated gold contracts at the Pan Asia Gold Exchange, or PAGE, which should be in full trading swing by the end of the year. Gold is being supported by physical buying but really needs investor demand to continue its uptrend. Norman thinks PAGE might be just the thing. "It could rejuvenate the gold price," he says, there is a big "speculative community in Asia."

Gold mining stocks were getting hammered Wedne! sday. Barrick Gold(ABX) was losing 3.19% to $45.62 while Newmont Mining(NEM) was dropping 4.46% to $62.58. Other gold stocks, AngloGold Ashanti(AU) and Goldcorp(GG) were trading lower at $41.40 and $44.83, respectively.

Agnico-Eagle(AEM)was getting particularly killed down more than 18% as the company was forced to shut down one of its mines, Goldex, in Quebec while it investigates and fixes water inflow and ground stability problems. Agnico will be forced to write off its investment in the mine of $260 million, amounting to $1 a share after tax.

-- New York.

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