By Alix Steel
03/11/11 - 12:35 PM EST
Gold for April delivery was adding $9 to $1,421.50 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,423 and as low as $1,404.80. The spot gold price was adding $6.60, according to Kitco's gold index.
Silver prices were up 78 cents to $35.85.
The worst earthquake in Japan for 140 years was squeezing global markets as investors tried to digest how this would affect neighboring countries, demand for commodities and curtail a worldwide economic recovery.
Gold was paring earlier losses and heading higher on safe haven buying but was missing the momentum that usually accompanies any market panic.
"I believe it could be and should be ... $20 higher," says David Morgan, founder of Silver-Investor.com. Morgan speculates that the lack of a big rally in gold points to big buyers doing some big selling. "It's profit taking [and] ... there's powers in there that say 'you know we don't want gold any higher.'"
Morgan is now forecasting a wide range for gold from about $1,320 to $1,420 an ounce.
There were other factors weighing on gold Friday. First, although the death toll was rising in Japan, the country's sophisticated infrastructure is helping it manage the damage. Also, after the Dow Jones Industrial Average saw an almost 2% selloff Thursday, investors were looking for any chance to buy. Betting on material, construction, and energy stocks as Japan will now be forced to rebuild parts of its country distracted investors away from the safety of gold.
Oil prices were also down $2 as investors worried that the tragedy in Japan would crimp local oil demand. Oil prices fell below the $100 mark in early trading as reports circulated that refiners in the country were shut down. Oil and gold have recently been moving in tandem.
Oil prices were also under pressure as OPEC said total crude oil production rose by 110,000 barrels a day in February to more than 30 million. Saudi Arabia production rose to almost 9 million barrels a day, more than offsetting declines in Libya of 232,700 barrels.
"Oil has been in the driver's seat," says Jon Nadler, senior analyst at Kitco.com, dominating everything from gold to stocks to currencies. "Gold and equities should be parting ways and going in different directions. It's not happening."
If the U.S. dollar sees safe-haven demand from investors, it could weigh on dollar-backed commodities like gold and silver. Nadler thinks the volatility in gold and silver will continue.
James Moore, research analyst at FastMarkets, says that both metals could be subject to even more profit taking "but given the mix of inflation concerns and the situation in the MENA and EU debt we expect dips will continue to be viewed as bargain hunting opportunities."
Investors had also been prepping for Saudi Arabia's much publicized "Day of Rage," which was organized by Facebook activists. The protests seemed quiet which also improved investor sentiment. Markets had been worried about an outbreak of violence the day after Saudi police clashed with Shiite protesters in the east side of the region.
Eurozone debt woes were still on the table but taking a back seat. Moody's downgraded Spain's debt rating on Thursday arguing that the country would need more than $21.07 billion to bailout its lenders. EU leaders are meeting in Brussels where they are expected to debate how to deal with civil war in Libya as well as how to deal with countries which have accessed a bailout and how to implement a permanent fund.
The drama doesn't stop there but seeps into China as the country reported that inflation in February was 4.9%. The reading was a mixed bag for gold prices. After China reported a surprise trade deficit for February, investors worried that China was slowing too fast, but China's high inflation reading could lead the government to continue to tighten its economy.
China has raised key interest rates three times since October and raised the amount of money banks must keep in their reserves more than 7 times over the past year, although the country has relaxed some of the requirements for certain banks.
China's deposit rate is currently 3% and with inflation at 4.9% the real interest rate is negative 1.9%. China has been raising its rate by 25 basis points, which means the central bank would have to raise rates 8 times to turn the real interest rate positive.
In a negative rate environment, gold is the investment of choice as it gives investors a safe place to store their cash while their money in the bank loses value.
--Written by Alix Steel in New York.
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