Gold Falls Through $1,360

Gold was little changed last night after falling into the high 1360s right after overnight trading began. Recovering from that spill, it had regained $1,370 just before midnight only to take a two-stage fall. By the time London trading opened at 3:30 AM ET, the metal had dropped to the low 1360s. A recovery proved to be only a relief rally; after peaking in the high 1360s around 5:00, the metal turned downwards again in a second drop that ended up slicing through $1,360. It accelerated and climaxed as 8 AM approached; the morning low of $1,356.30 was made right before 8:00. As of 8:07, the spot price was $1,357.90 for a drop of $12.60 on the day. The Kitco Gold Index split the loss into -$12.50 due to predominant selling and -$0.10 due to a strengthening greenback.

The U.S. Dollar Index's recovery continued until it reached 78.8. Thwarted from rising above that level, it sunk back to below 78.55 as night turned into morning. Reversing, it managed to jump all the way to 78.84 before sinking even lower on the pullback. Then rebounding and churning around 78.55, it blipped up just before 8:00. As of 8:17, the Index was at 78.63.

A Bloomberg report ascribes the fall to increased optimism about the economy.

Industrial production in the U.S. rose 0.8 percent in December, more than forecast, on gains in business equipment and home electronics. Sales of existing homes in the U.S. probably rose 4.1 percent last month, according to a Bloomberg survey. Gold assets held by exchange-traded products declined in six of the past seven sessions.

“Market sentiment for gold has shifted since the end of 2010, as evidenced by net outflows in ETFs,” said Anne-Laure Tremblay, an analyst at BNP Paribas in London. “This shift accompanies lower uncertainty in the economic outlook following decent U.S. industrial data.”

A pair of Australian analysts also cut their 2011 gold price forecast slightly, on the grounds that safe-haven demand is waning because of increased optimism in Euroland. The article also notes that holdings of 10 gold ETFs have dropped 9.84 metric tonnes yesterday to 2,067.57 tonnes.

An earlier Reuters report said that gold was steady last night due to a favorable reception to mainland Chinese inflation data.

China finished 2010 with a bang, its growth soaring past expectations while inflation slowed less than expected, numbers that could prod the government to step up its tightening measures.

Beijing expected inflation pressure to remain high in the first quarter due to imported inflation.

"The market is divided between whether to get out of it due to risk appetite abating, or whether to get into it due to the inflation concern in China rising," said Jonathan Barrat, managing director of Commodity Broking Services. "So it (data) is very supportive of gold prices."

On the other hand, an Asian dealer noted that drainage from gold ETFs is offsetting strong Asian physical demand. The article also notes that holdings in the SPDR Gold Shares Trust (GLD) dropped to 1,251.433 tonnes yesterday. That new volume represents a loss of 5.47 tonnes from Tuesday's holdings.

A Wall Street Journal article says this morning's fall was due to second thoughts about mainland Chinese growth and inflation, as well as a stronger greenback.

"There has been a mixed reaction to the Chinese data, with some to-ing and fro-ing in the complex," said FastMarkets.com analyst James Moore. "We're seeing some profit-taking and long liquidation as people wonder whether the People's Bank of China will have to take further measures to cool the economy," he added.

Another interest-rate rise could damage safe haven commodities such as gold, which flourish as an alternative currency when interest rates are low.

Although inflation was lesser than expected, growth was greater - hence the fear that more tightening will be imposed.

The weekly U.S. initial jobless claims numbers showed a drop of 37,000 last week to 404,000, which mostly reversed a sharp jump for the previous week. The number was below expectations, making for the kind of good news that the gold market doesn't like. As a result, the rout that paused just after 8:00 continued. Building on a small drop before the news was released, gold continued its tumble; $1,350 was sliced through. As of 8:50 AM, the spot price was $1,348.20 for a drop of $22.30 on the day. The Kitco Gold Index divided the loss into -$18.50 for predominant selling and -$3.80 for greenback strengthening. The U.S. Dollar Index broke out of its rut to rise, making 78.85 by 8:54.

Evidently, shrinking ETF holdings were the kibosh that more than canceled out continuing physical demand for gold. Worries about the People's Bank of China tightening further added to the bearishness. $1,350 is an important support level, and it remains to be seen if the metal can hold above it.