US gold sinks most in a month; safe haven questioned

NEW YORK: US gold futures fell their most in a month on Thursday, raising fresh questions about the metal's validity as a safe haven, with a rallying dollar and recession worries sparking risk aversion across markets.

Gold futures in New York tumbled nearly 5 percent before closing down more than 3 percent on indiscriminate selling of commodities and stocks. The dollar hit eight-month highs against the euro and US Treasuries rallied as investors took refuge for a third time this week in the greenback and bonds.

The fear factor this time was a third straight month of manufacturing declines in China, as the world's second-largest economy began to exhibit signs of fading demand from the United States and Europe.

Weak German data and renewed pessimism about the US economy from the Federal Reserve heightened worries about a global recession.

In gold, the selloff stemmed largely from the dollar after the Fed said on Wednesday it was shifting its portfolio toward longer-term debt to bolster the US economy. Investors unwound leveraged positions funded in dollars in response.

Short-term interest rates also rose, helping the dollar further, as the Fed's proposed $400 billion portfolio reshaping did not involve an expansion in money supply.

The benchmark December gold futures contract on New York's COMEX settled down $66.40, or 3.7 percent, at $1,741.70 an ounce, after setting a session low at $1,723.20. It was the contract's sharpest one-day loss since Aug. 24.

In bullion, the spot price fell to around $1,741 by 2:20 p.m. EDT (1820 GMT), versus Wednesday's last registered trade of $1,781.29.

It hit a one-month low of $1,721.34 earlier.

Futures and bullion swung more than $60 between the highs and lows of the day, the volatility again shocking some of the most seasoned players in gold and leading to renewed disputes about whether the precious metal was a haven at all.

"Gold is never a safe haven," said Dennis Gartman, an independent investor and regular commentator on gold, based in Virginia. "When something can move 3, or 5 or 6 percent in the course of two days, that's not a safe haven. Safe havens should be quiet and stable ... not violent."

To further his argument on how much more volatile things could get, Gartman said gold seemed poised for both a rebound and deeper losses.

"I get the sense that gold may bounce from here. But if you get a bounce up to $1,760 or $1,780 or so in the next two days, there'll be plenty of people selling it up there.

"I'm not sure there is a price that will get the market into absolute buying again. I think it'll have more to do with the passage of time. We'll have to see if this morning's lows hold for honestly a month or more, before anybody steps back to say 'I'm going to buy it now'," Gartman said.

Technical analysts said gold futures were within $20 of a new support area, which if broken could further unravel this year's gains of more than 20 percent.

"Gold is forming a large, ominous double-top pattern. There is a neckline at $1,705.40 ... that's an important area to watch," said Adam Sarhan, chief executive of Sarhan Capital in New York.

"We're either going to have a light-volume pull back toward that support and bounce or it's going to slice through this neckline like a hot knife through butter."

Hans Kashyap, president of Analytics Research Corp in California, said there was still a good chance that gold would digest the current pull back and hold in a larger trading range, roughly between $1,700 and $1,900.

The world's largest exchange-traded fund in gold, the SPDR Gold Trust, has seen its holdings in bullion fall by nearly 1.0 million ounces this year. So far in September, holdings of gold have risen by just under half a percent after nearly two straight weeks of outflows in the early part of the month.

Some suspect that gold is not as fundamentally or technically weak as suggested, but suffering because of a relatively high value that made it easy to sell for covering losses in stocks and other bad trades.

Gold has finished up in five of the last eight months and its race to record highs above $1,920 an ounce in September had put a number of investors in the money, some analysts said.

"Commodities may be the biggest risk assets but they are

also the easiest to liquidate, and this is probably more true with gold than anything else," said Sean McGillivray, vice president and head of asset allocation for Great Pacific Wealth Management at Grant Pass in Oregon.

Copyright Reuters, 2011