US MIDDAY: gold hits 5-1/2 month low

US gold futures hit a 5-1/2 month low early on Wednesday before retracing losses as worries about the subprime mortgage sector prompted jittery investors to sell commodities and liquidate holdings in bullion exchange-traded funds (ETF).
Analysts said they expected prices to stabilise in the near term because of support from physical buyers and renewed demand from overseas investors. At 10:32 am EDT (1432 GMT), most-active gold for August delivery on the COMEX division of the New York Mercantile Exchange was up 60 cents at $645.90 an ounce, after sinking to a early session low of $641.10, its cheapest level since January 12. It reached a high of $646.30.
James Steel, analyst at HSBC, said that concerns over the credit markets and investors' flight from risk pummelled gold and silver and accounted for a general pullback in commodities.
"Now we are also seeing some liquidation in the ETFs," which had generally done well and remained fairly firm until recently, Steel said. Data showed that holdings in StreetTRACKS Gold Shares, the largest gold ETF, dropped just over 11 tonnes to 463 tonnes on Wednesday.
Investors have become increasingly anxious over the past weeks by troubles at two Bear Stearns-managed hedge funds with exposure to subprime, or high-risk, US mortgage securities.
Stephen Platt, analyst at Archer Financial Services, said that gold's weakness was related to the subprime mortgage-sector problem and worries that global liquidity was contracting, and that encouraged long liquidation amid fears that economic growth could slow.
In the short term, however, analysts expected support in gold prices. "I'm looking for a little bit of stabilisation. I think that at least for now some of these fears are a little bit overblown. We probably will see renewed foreign investor demand," Platt said.
Steel said that lower bullion prices could stir demand from physical buyers. He said the market could wait for a measurable increase in physical demand. Spot gold rose to $643.20/643.80 an ounce, compared with $642.00/642.60 an ounce late Tuesday. The London gold fix was set at $642.10.
COMEX September silver was up 4.9 cents at $12.45 an ounce, dealing between $12.245 and $12.480 an ounce. Spot silver was quoted at $12.31/12.35 an ounce, above the late Tuesday quote of $12.24/12.27. London silver was fixed at $12.26 an ounce. NYMEX October platinum was up $4.10 at $1,282.10 an ounce. Spot platinum traded at $1,266.50/1,270.50 an ounce. September palladium fell $2.00 to $369.00 an ounce. Spot palladium fetched $365/369.