Gold Prices Look to $1,300 Support Level

Gold is still trying to find its footing after falling $107 so far in 2011. The main driver has been technical selling as those holding gold as a hedge or as protection during options expiration have dumped their positions. The selling accelerated as gold touched key support levels like $1,375 and $1,320 which then triggered sell-stops in which traders must sell to lock in gains.

The SPDR Gold Shares exchange-traded fund shed a modest 3 tons Thursday taking the yearly total decline to 58 tons.

Gold now is eyeing the $1,300 level, which isn't important from a technical standpoint but may be from an emotional standpoint as investors who got into gold late in the game might be tempted to sell. Most traders are eyeing $1,265 to $1,275 as the big support level, which is expected to hold.

Pat Heller, general manager at Liberty Coin Service, said that customers are asking to be told when prices in gold and silver have bottomed before buying coins and bullion. This means the demand is out there but just not yet.

"We were selling more gold coins and ingots to retail customers as prices were rising late last year ... but our retail sales of bullion-priced silver coins and ingots have increased with the price drop. Not extreme, maybe up 25% from the last quarter of 2010," Heller said.

In terms of silver, down 13% in 2011, Heller says that if prices recovered and held at $28.50 then retail demand could really take off. Heller says that even with the selloff, however, supply is tight for silver coins and ingots.

"Large orders for Silver Eagles are now one-two weeks delivery, one-ounce silver rounds and rectangles are one-two weeks, 10- and 100-ounce silver ingots are on the brink of not being available for immediate delivery."

What's curious is that certain headlines should be a green light for gold as a safe-haven asset. Moody's warned on U.S. debt Friday saying it could issue a negative outlook within the next two years. Although no rating downgrade is imminent, it might not be far off. Japan's rating was downgraded by S&P on Thursday, Japan's first downgrade since 2002. But there has been no safe-haven bid from gold.

The riots and protests across the Middle East and North Africa should also be putting a bid under gold as investors rush to preserve their wealth in light of political unrest. But it's not happening. Even a minor explosion in Davos, Switzerland, yielded no panic.

"These are all conditions that should help gold make progress to higher levels and certainly try to overcome resistance in the mid-$1,300s," says Jon Nadler, senior analyst at Kitco.com. "So far that hasn't been the case."

Economy Gains, but Jobs Crisis Continues

The economy gained strength at the end of last year as Americans spent at the fastest pace in four years and U.S. companies sold more overseas.

The growth is boosting hopes for a stronger 2011. But it remains too weak to ease high unemployment.

The Commerce Department recently reported that growth rose by an annual rate of 3.2 percent in the October-December quarter. That's better than the 2.6 percent growth in the previous quarter. And it was the best quarterly showing since the start of last year.

The economy has now consistently picked up speed since hitting a rough path in the spring.

For all of last year, the economy grew 2.9 percent, the most since 2005. It was an improvement from 2009 when the economy suffered its worst decline in more than 60 years.

All told, the economy produced $13.38 trillion worth of goods and services last year, a new record. It surpassed the pre-recession peak reached in the fourth quarter of 2007.

Still, the economy isn't growing fast enough to drive down unemployment, which was 9.4 percent in December. It takes about 3 percent growth just to create enough jobs to keep pace with the population increase. By some estimates, growth would have to be closer to 5 percent for a full year to drive down the unemployment rate by 1 percentage point.

Increased consumer spending was a key reason the economy grew more strongly. Americans boosted their spending at a 4.4 percent pace, the most since 2006. They spent more on furnishings, appliances, cars and clothes.

That's largely why economists are more optimistic about the economy's performance this year. Consumer spending accounts for roughly 70 percent of overall economic activity.

After the recession ended in June 2009, consumers kept spending cautiously. At the end of last year, though, that began to change.

Economists expect consumer spending will rise 3.2 percent or more for all of 2011. That would be almost double last year's anemic rate.

A cut in workers' Social Security taxes, higher stock prices and wage gains from a slowly healing jobs market should make people feel better about spending, economists say.

Workers' wages and benefits increased by 2 percent last year, the Labor Department said in another report. That was up from a 1.4 percent increase in 2009, but was still the second-smallest increase in nearly three decades. Stronger hiring this year should help wages grow more. But lavish pay raises and bonuses aren't expected for most workers because competition for jobs remains fierce, economists say.

In the final quarter of last year, consumers spent more and saved less. Americans saved 5.4 percent of their disposable income, compared with 5.9 percent in the third quarter. Economists are hopeful that consumers can power the economy, especially as government stimulus fades and businesses spend less replenishing their stockpiles.

U.S. 30-Year-Bond Yield Touches 9-Month High

Yields, which move inversely to prices, had been higher before the confidence report, pushing 30-year yields to the highest since April following a government report showing the U.S. economy grew 3.2% in the fourth quarter, a slower pace than economists had expected.

Still to come is the Federal Reserve's last of four bond buybacks this week.

"We can say this was unequivocally a very strong quarter for American consumers," said Dan Greenhaus, chief economic strategist at Miller Tabak. "To be certain, we don't expect this rate of consumption to continue, but for now, it is incredibly encouraging to see consumers feeling this confident."

The economy also is still fighting headwinds, which has limited the decline in investor interest in Treasury bonds, analysts said.

"Equities continue to drift much higher; however, I think people still want to remain hedged against further housing deterioration and sovereign risk and that's why we continue to see demand for Treasurys," said Thomas di Galoma, head of U.S. fixed-income trading for Guggenheim Securities.

With 30-year yields reaching the highs of their recent range, it also widened the gap between the longest-dated securities, most sensitive to inflation expectations, and short-term debt.

The gap between 2-year and 30-year yields increased to 4.02 percentage points earlier Friday, January 28, 2011, near a record.

Investors express worries about inflation, alongside worries about the government's long-term deficits, by shunning long-term debt and preferring shorter-dated securities. That tends to increase the gap in yields between long- and short-term debt, which is known as a steepening of the yield curve.