Gold Declines on Slumping Investment Demand

Source: Bloomberg, Pham-Duy Nguyen (1/26/11)

"The risk trade is back on."

Gold futures fell for the second straight day as equities rallied, eroding demand for the metal as a haven.

The Dow Jones Industrial Average topped 12,000 for the first time since June 2008. Holdings in exchange-traded products backed by gold yesterday tumbled the most since October 2008. Before today, the commodity fell 6.3% this month after reaching a record of $1,432.50 an ounce on Dec. 7. The metal rose 30% last year, beating returns in stocks and bonds.

"The funds are turning away from gold," said Frank Lesh, a trader at FuturePath Trading LLC in Chicago. "The risk trade is back on."

Gold futures for February fell $7, or 0.5%, to $1,325.30 at 11:16 a.m. on the Comex in New York. Earlier, the most-active contract gained as much as 0.4%. Yesterday, the price dropped to $1,321.90, the lowest since Oct. 27.

Assets in gold-backed ETPs dropped 31.02 metric tons, or 1.5%, to 2,043.09 tons yesterday, the lowest level since Aug. 10, according to data compiled by Bloomberg from 10 providers. Holdings reached a record 2,114.6 tons on Dec. 20.

"There is no fear trade, no flight to quality," Lesh said. Gold may drop to $1,280, close to the 200-day moving average, he said.

Losses may be limited on speculation the slump is overdone, said Tom Pawlicki, an analyst at MF Global Holdings Ltd. in Chicago.

Silver futures for March delivery dropped 8.5 cents, or 0.3%, to $26.72 an ounce. Before today, the metal fell 13% this month after rallying 84% in 2010.

Palladium futures for March delivery rose $9.85, or 1.3%, to $794.60 an ounce on the New York Mercantile Exchange.

Platinum futures for April delivery climbed $5.10, or 0.3%, to $1,792.40 an ounce.

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