Slip, sliding away: Gold retreats on firm dollar

Slip, sliding away: Gold retreats on firm dollar

“Ultimately the fundamentals that we thought were positive for gold are still in place -- issues in Europe and the United States, slowing GDP growth, central banks doing their magic” says analyst.

October 2, 2011 3:59 by Reuters

Renewed fears of a slowdown in the global economy combined with the long-dragging euro zone debt crisis weighed on European stocks on Friday, as one of the most volatile and worst quarters since late 2008 came to an end.

Stock market weakness and worries over the euro zone crisis hurt the euro , which fell 1 percent versus the dollar. The dollar has benefited from this month’s elevated risk aversion, up nearly 6 percent against a currency basket.

The risk aversion that drove gold prices higher earlier in the quarter turned negative for the metal as a slide in other assets prompted selling to cover losses elsewhere. A rise in margin requirements for U.S. gold futures also weighed.

Longer term, however, it is still expected to benefit from concerns over the U.S. and euro zone economies and the instability of the wider financial markets.

“Any time you have a sharp spike in risk aversion, gold prices tend to come off, and then once the markets start to normalise, prices tend to benefit,” said Bank of America-Merrill Lynch analyst Michael Widmer.

“The fact that gold gets caught up makes perfect sense — if you’ve got margin calls… and other positions under water, that will cause selling,” he added.

“Ultimately the fundamentals that we thought were positive for gold are still in place — issues in Europe and the United States, slowing GDP growth, central banks doing their magic.”

U.S. gold futures for December delivery were down 1.50 an ounce at $1,615.80.

ETF INVESTORS HOLD FIRM

Holdings of the world’s biggest gold-backed exchange fund, New York’s SPDR Gold Trust , dipped by 10 tonnes, the exchange said on Thursday, but were almost unchanged month-on-month despite the fluctuations in gold prices.

“The price drops were driven by investors’ reaction to declines in equities, and were a combination of the need to raise cash or lock in profits,” said HSBC in a note. “As long as ETF holdings remain steady, we expect gold prices eventually to stabilize and resume their long-term advance.”

Data from the International Monetary Fund showed central banks also added to gold reserves in August, with Thailand buying 9.3 tonnes last month, Russia adding 5.6 tonnes and Bolivia buying 7 tonnes of gold.

Demand for physical gold, which picked up as prices declined from record highs, remained a firm support to the market, with the advent of the Indian festival season helping drive buying in the world’s biggest gold consumer.

Silver was down 1.3 percent at $30.17 an ounce. Holdings of the largest silver ETF, the iShares Silver Trust , fell nearly 23 tonnes on Thursday.

Silver prices have also seen extreme volatility this month, in line with gold, and are set to end the month 25 percent lower, and the quarter down 10 percent.

Spot platinum was down 0.6 percent at $1,507.49 an ounce, while spot palladium was down 0.9 percent at $610.25 an ounce.

By Jan Harvey

(Editing by James Jukwey)