Gold Continues Sinking, Bounces Off $1,325

The surprise news of a 0.5% contraction in U.K. GDP for the last quarter of 2010 didn't do much to help gold. After blipping up when evening trading commenced, the metal sunk to $1,330 before turning up again to reach $1,335. Then, it sunk again right around midnight ET. Initially hovering at around $1,332, it resumed sinking at 4:00 after a false start. $1,330 yielded, as did $1,325 for a time; the early-morning low of $1,321.70 was followed by a bounce-up that kept the metal roughly above $1,325. As of 8:08 AM ET, the spot price was $1,324.70 for a drop of $9.80 on the day. The Kitco Gold Index split the loss into -$3.80 due to predominant selling and -$6.00 due to a strengthening greenback.

The U.S. Dollar Index did move up, but not before a night spill that brought it close to 77.8. A recovery up to 78 prefaced another spill to the same level, which ended abruptly with a run up to above 78.35. A secondary reaction pulled it down to 78.1, but it resumed its climb at 7:00 AM to reach 78.4. As of 8:17, the Index was at 78.28.

A Bloomberg article ascribed the drop to further weakening in safe-haven demand as Eurozone optimism returns.

Gold jumped 30 percent last year after governments spent trillions of dollars and kept interest rates low to bolster economies. Europe’s sovereign-debt crisis also boosted the metal’s allure. Federal Reserve Chairman Ben S. Bernanke will keep the benchmark rate unchanged at zero to 0.25 percent at the central bank’s two-day meeting starting today, according to economists surveyed by Bloomberg news.

Global investors are becoming more confident about the economic outlook, according to a quarterly poll of Bloomberg subscribers, with almost twice as many saying they will cut gold holdings in the next six months as increase them. More than half said the gold market is a bubble, according to the poll of 1,000 investors, analysts and traders, which was conducted Jan. 20-24.

The article also said the holdings of ten gold ETFs tracked by Bloomberg dropped 11.12 tonnes yesterday to 2,074.11 tonnes.

An earlier Reuters report noted strong economic data in the Eurozone helped fuel the above-mentioned optimism, as did an decision by the Indian central bank to hike its rate, but strong physical buying tempered the decline.

Euro zone industrial new orders rose more than expected in November, confirming the strength of recovery in industry in the economic union.

The improved economic data, combined with speculation that the European central bank might raise interest rates, pushed the euro to a two-month high. The single currency held near the peak on Tuesday.

"The gold market is a bit negative for the time being," said Ronald Leung, a physical trader at Lee Cheong Gold Dealers, adding that talks on more tightening moves from China before the Lunar New Year holiday also adds to the bearish sentiment.

"But on the physical side, people are still buying. There doesn't seem to enough supply in the physical market."

The article quotes another analyst as saying physical demand is still strong for now, but the market will go quiet once the Chinese New Year festival gets started.

A Wall Street Journal article says trading is expected to be muted while the two-day Fed policy meeting is being condusted today and tomorrow.

A trader said gold prices are under pressure from expectations that funds will resume selling amid fears of rising interest rates, as well as speculation of lower physical demand during year-end celebrations in China.

Tuesday's trade is likely to be "dull," though, owing to the scarcity of economic data releases, VTB Capital analyst Andrey Kryuchenkov said.

A Goldman, Sachs report said increased volatility in ten-year TIPS indicates uncertainty about the direction of real interest rates, making for another negative for gold.

With the opening of regular trading at 8:20 came a respite. After sinking below $1,324, the metal reversed course around 8:10 and went back up above $1,325. That rebound continued as the pit session started up, until a little after 8:30 when it briefly got above $1,330. As of 8:43, the spot price was $1,329.60 for a drop of $4.90 on the day. The Kitco Gold Index attributed +$0.20 to predominant buying and -$5.10 to greenback strengthening. The U.S. Dollar Index continued muddling along at about where it was; as of 8:48, it was at 78.27.

Gold ended up testing the $1,325 level, despite continued physical demand, but managed to hold off from further sustained declines below that level. The metal hasn't had that good a time as optimism comes back and the troubles that pushed it up in the first place fade into dormancy. Although losing about $100 from its peak, it isn't in full correction mode. The question of the day today will be if $1,325 keeps holding.