Is Gold Getting Precious Again? (GLD, GDX, GDXJ)

Since hitting a new high of more than $1,430 on December 7th, the price of gold has settled down again (sort of) to around $1,385. There appear to be several factors at play here, most pushing the price upwards, but a few working in the opposite direction. Concern over the euro, which has been putting pressure on the European single currency, is perhaps the single biggest force behind gold’s rising price. Investors are seeking some protection against the wobbling currency by turning toward gold.

A second factor pushing up the price of gold is increased demand lately from exchange-traded products. The SPDR Gold Trust ETF (NYSE: GLD) purchased 15 metric tons of gold on Friday, December 17th, it’s largest purchase since early last summer. The big buy suggests that investors are not hopeful about a strong economic recovery in the US, nor are they confident that the European Union has figured out a sound way to deal with its members’ sovereign debt problem.

A third factor is the increasing tension between the two Koreas. South Korea has gone ahead with a military exercise that North Korea had threatened would draw “brutal consequences”. Those consequences have evaporated, according to The New York Times , with North Korea releasing a statement saying that it was “not worth reacting” to the South’s exercise. The North’s muted reaction took some steam out of gold’s rise today, but the tensions remain at a low boil.

Adding to the rise are forecasts that the price of gold will increase to $1,500/oz. by the end of 2011, and could go as high as $1,600/oz. by the end of 2012. A survey of 44 mining companies by Pricewaterhouse Coopers indicated that 73% of the respondents expect gold prices to keep rising through the next 12 months, peaking at about $1,500 next year. An analyst for Deutsche Bank has extended the gain out to $1,600 in 2012.

Weighing down the price of gold is a slowdown in buying from India for jewelry making, as the high prices for gold restrain buyers. Technical traders are also being cautious as end-of-the-year holidays put a lid on trades. The technicals say there is support at $1,380, but resistance at $1,395. Trading could continue within that narrow range for the rest of this week.

The bulk of the action in gold is clearly to the upside for the coming year. The sovereign debt problems in Europe will not be solved, and are likely to get worse if Spain continues to flail. Demand for gold will also be driven by a lack of enthusiasm for the euro, and perhaps, for currency trading in general. The safe haven appeal of gold gives the metal an edge for spooked investors.

Gold miners are looking good for next year too. The Market Vectors Gold Miners ETF (NYSE: GDX) and the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) are both continuing their 12 month advances. The Juniors have gained nearly 70% in the past year, while the Miners have jumped about a third. Both set new 52-week highs earlier this month, although they’ve given some of that back as gold prices have dipped from the all-time highs. Gold is up more than $6/oz. today, to $1,385.30 before the stock markets open.

Paul Ausick