Gold Continues to Glitter

Gold futures climbed for a third day and continue to rise for a 4th,  to settle at an almost month-high on a combination of a softer U.S. dollar and safe-haven flows in response to the ECB  warning of “substantial” downside risks for the euro zone’s outlook.

Gold for February delivery reached $8.10, or 0.5%, to close at $1,647.70 an ounce on the Comex division of the New York Mercantile Exchange.

The dollar’s retreat sparked more demand for the precious metal as a weaker greenback makes gold more affordable.

The absence of any push or news to drive buyers to gold is affecting both demand and price.

Gold ended at a record $1,891.90 an ounce this past August on news of additional quantitative easing from the Federal Reserve reached a fever pitch. But gold is down about 15% since then, closing Thursday at $1,647.70 an ounce. Prices fell 10% in December alone. The Fed has been backing off of any direct action as the US economy is showing slow improvement.

The shiny metal managed a 10% gain for 2011, much better than the Standard & Poor’s 500-stock index, which finished the year flat on a price basis.

Investors have cut gold positions over the past year. Holdings in SPDR Gold Trust, the largest exchange-traded fund backed by gold, offer a good picture of the fund liquidation that has taken place in recent months.

The ETF’s gold holdings have remained around 1,250 metric tons for most of December and so far this year, but that’s still a 2.4% decrease from December 2010, when the fund had 1,281 metric tons. Holdings jumped 13% in 2010.

Gold investors have seen no signs that the Fed will ease anytime soon, while the euro zone debt crisis has taken the euro down several notches to a 16 month low.

European headlines still impact gold futures, to be sure, but increasingly the metal has traded on U.S. dollar moves. It would take huge problems in the EU to drive the price of gold, but any changes in China or the Middle East or continued problems with Iran.

While buyers are likely to see their gold holdings rise in value for a 12th consecutive year, any advance is expected to be more modest than in recent years.

Minimum returns from gold would test short-term traders who need volatility and profit from gold purchases. Yet those who own gold as a long-term answer to currency concerns and for portfolio diversification could find their patience is rewarded. Investing in gold-related companies is also a reemerging trend. Gold will remain a safe haven and a sure thing in turbulent times.

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