Tuesday, March 13, 2012

Gold falls 2% as Fed easing hopes fade

Gold fell about 2% on Tuesday to a seven-week low after the Federal Reserve acknowledged the recent signs of economic strength and offered few clues on further U.S. monetary easing.

The metal has fallen 7% since late February as some funds might have exited the bullion trade on fears central banks could be done with quantitative easing or asset purchases by the Fed after an encouraging US employment recovery.

Quantitative easing, or major asset purchases by the Fed, keeps interest rates and borrowing costs low, which makes gold more attractive compared with yield- or dividend-bearing assets such as bonds or stocks.

Gold's biggest one-day drop in a week has erased its unusual premium to platinum. Platinum, which is mainly used by the auto industry, has recently outperformed bullion due to supply fears out of top producer South Africa.

Also weighing heavily on gold was a Wall Street rally after JPMorgan Chase (JPM.N) announced a dividend increase and major share repurchase. The S&P 500 .SPX rallied nearly 2% on optimism related to a successful stress test on US banks.

"The FOMC, plus the Bernanke statement, plus the good data are wringing QE3 out of the market and the extra QE3 premium built into gold," said James Steel, chief commodity analyst at HSBC.

Spot gold was down 2.1% at $1 663.99/oz by 3:47 p.m. EDT (19:47 GMT), having earlier hit a seven-week low of $1 661.99/oz.

Gold fell nearly $100 or 5% on February 29 when Fed Chairman Bernanke did not mention another round of easing in a statement in his testimony to the US Congress.

The metal's losses quickened on Tuesday after bullion again broke below chart support at its 200-day moving average.

US gold futures for April delivery settled down $5.60 at $1 694.20/oz ahead of the FOMC statement. Trading volume was about 25% above its 30-day average, preliminary Reuters data showed.

In a statement after its policy meeting, the Fed offered just a slight upgrade to its economic outlook, saying it expects "moderate" growth over coming quarters with the unemployment rate declining gradually.

"This just reaffirms that the Fed is looking...to try to keep interest rates as low as possible and to keep monetary policy as accommodative as possible, and that's a plus for gold in the medium term," said Axel Merk, chief investment officer of Merk Funds with about $700-million in assets.

Some analysts, however, said the Fed's comment about a spike in energy costs could temporarily push up inflation also raised speculation the central bank could tighten monetary policy to battle rising prices.

Gold has more than doubled in price since the Fed unveiled its first round of QE in late 2008, and a $600-billion stimulus package in 2010 gave a major boost to commodity prices.

Even with the prospect of no more QE to sustain any major gold rallies, investors have maintained their interest in the metal, as evidenced by the rise in global holdings of gold in exchange-traded products to record highs this week.

PLATINUM REGAINS PREMIUM TO GOLD

With platinum back in pole position for the first time since September, pressure on gold may intensify, traders said.

"The platinum players are jumping on to the buy platinum, sell gold theme, now that the traditional relationship is falling," said Donald Selkin, chief market strategist with National Securities Corp. in New York.

Much of the boost to the platinum price this year has come from a month-long stoppage at the world's second-largest producer Impala Platinum's (IMPJ.J) largest facility at Rustenburg, which the company said cost nearly 200 000 oz in production and would probably cut deliveries in April by as much as 50%.

Spot platinum turned negative in last session. It eased 0.5% to $1 680.43/oz, eking out a small premium to gold and ending for now the rare trend of the last six months.

In other precious metals, silver dropped 1.5% to $33.70/oz, while palladium gained 0.7% to $700.83/oz.

Source: Reuters