Tuesday, Sep 02, 2008

By Allen Sykora

Of DOW JONES NEWSWIRES

Technical selling was triggered in gold and other precious metals Tuesday as they slid in response to moves in other markets, observers said.

"Obviously, to some extent, it's a knee-jerk or reflex reaction to the drop in oil and strength of the dollar," said Jeffrey Nichols, managing director of American Precious Metals Advisors.

Several traders cited fund selling, starting overseas and continuing into New York trading hours. Sell stops were triggered.

Yet, gold and silver bounced from their lows as value buying emerged. Furthermore, several analysts cited one positive for the market - the weakness in recent weeks has triggered improved physical demand from jewelry fabricators and others, and the most recent sell-off has likely continued this.

December gold fell $24.70 to $810.50 an ounce on the Comex division of the New York Mercantile Exchange. December silver lost 56.2 cents to $13.145.

The slide began in screen trading during the U.S. Labor Day holiday Monday and accelerated overnight and early in the pit session, observers said. The move occurred amid weakness in crude after Hurricane Gustav apparently did not hit the energy installations in the Gulf of Mexico with as much force as some feared. Gold prices tended to track oil last week in response to hurricane worries.

"The market bid up crude oil prices ahead of the storm," said Bart Melek, global commodity strategist with BMO Capital Markets. "It looks like Hurricane Gustav had less impact than anticipated, with most of the facilities in the Gulf in tact for the most part with fairly short periods between when they shut down and when they're going to open up."

"That removed some of the nervousness priced into crude oil," echoed Carlos Sanchez, precious-metals analyst with CPM Group.

October crude oil was down $6.55 to $108.91 a barrel as the gold pit closed after hitting an overnight low of $105.46 that was its weakest level since April.

"There is a theme of reducing the short U.S. dollar/long commodities trade," Melek said. "With oil down sharply, inflation expectations are waning."

Otherwise, many investors buy gold as a hedge against inflation.

Furthermore, the dollar strengthened - which tends to weigh on the precious metals - amid less worries about high oil prices pulling down the U.S. economy further, Melek explained. As gold closed, the euro was down to $1.4519 from $1.4673 late Friday. It hit a low of $1.4468 that was its weakest level since February.

The continuing strength in the dollar comes on the heels of some recently improved U.S. economic data, including last week's upwardly revised second-quarter growth in U.S. gross domestic product, Nichols said.

"That may have some implications for interest-rate expectations," he said. "And interest-rate expectations are one of the things driving the dollar."

The thinking is stronger growth might allow the Federal Reserve to move up any tightening of monetary policy, thereby underpinning the dollar and undercutting gold, he continued.

Technical selling was triggered starting around $820 to $815 in the gold and $13.50 to $13.25 in the silver, observers said.

Sanchez and Melek both reported that some money may have flowed away from commodities such as gold and back into equities.

Gold and silver bounced back from their weakest levels, as oil recovered bounced back from its lows and traders were not yet ready to let it fall below $100, said Rob Kurzatkowski, futures analyst with optionsXpress.

"There is still some value buying out there," he said.

There was not a massive change in the fundamental picture, he pointed out.

"It's not like the Fed came out with a surprise rate hike," Kurzatkowski said. "Traders have certainly been more bullish on the dollar lately, but not this bullish."

Furthermore, still others said the lower price for gold lately has spurred physical buying, especially in the key consuming nation of India.

"I wouldn't be surprised if people are locking in the physical," said Gijsbert Groenewegen, managing partner of Gold Arrow Capital Management. "Don't forget, we soon are starting the festivities and wedding season in India, which seasonally is when gold tends to get stronger."

Other observers report the same thing.

The Bombay Bullion Association reported that India's imports were estimated at around 98 to 100 metric tons in August, compared to 68 during the same month a year ago and up sharply from 22 tons in July.

Another report showed that Turkey's gold imports rose by 70% in August to 47.195 metric tons, the highest ever recorded after only 10.71 in July.

UBS strategist John Reade's daily research report also cited a pick-up in physical demand lately, especially after previous de-stocking in the Indian market. This physical demand has absorbed much of the liquidation lately in other markets, such as Comex, he said. In fact, he described Monday's Indian demand as a "near-record day" prompted by the dollar- and crude-induced sell-offs of gold.

Groenewegen suggested physical gold and supplies might be tightening. Plus, he said, the high cost of mining metals means prices likely will have to eventually go higher to encourage more output.

The platinum group metals also tumbled, with a trader of these metals citing the same factors as in the sell-off for gold - weaker crude oil but a stronger dollar. December palladium fell $13.75 to $293.05 an ounce, while October platinum declined $86.30 to $1,403.50.

In the case of palladium, the end of the rollover period from the September to the December futures may have taken away some support, Sanchez said. 


 
Settlements (includes open-outcry and electronic trading): 
London PM Gold Fix: $798.50 versus $822.25 on Monday and $833 Friday 
Spot gold at 2:20 p.m. ET: $806.90, down $11.20 from previous day; Range: $790.95-$819.95 
December gold: $810.50, down $24.70; Range $795.20-$842.80 
December silver: $13.145, down 56.2 cents; Range $12.55-$13.90 
October platinum: $1,403.50, down $86.30; Range $1,375.30-$1,499.80 
December palladium:  $293.05, down $13.75; Range $285.45-$309

-By Allen Sykora, Dow Jones Newswires; 541-318-8765; allen.sykora@dowjones.com

(END) Dow Jones Newswires

02-09-08 1850GMT