Gold retreats as demand may soon ease

Gold extended a retreat from a record, dropping for a third day, on speculation that an improving US economy will result in higher interest rates, potentially boosting the dollar and cutting demand for the precious metal.

Bullion slumped on December 4 as the US currency rallied on a Labour Department report that showed the fewest monthly job cuts since the recession began. The Dollar Index, a six-currency gauge of the dollar’s value, advanced as much as 1.8 per cent that day, before paring gains on Monday.

“Some of the bubble in gold prices is popping as the dollar looks like regaining its lost ground,” said Yu Kyung Kyu, a trader with Eugene Investment & Futures Co in Seoul. “Still, it’s too early to say for sure whether gold will reverse its bullish trend.”

Gold for immediate delivery, which touched a record $1,226.56 an ounce on December 3, dropped as much as 1.5 per cent to $1,144.34, and traded at $1,153.93 at 9:41am in Singapore. February-delivery futures on the New York Mercantile Exchange’s Comex unit slid as much as 2.1 per cent.

US payrolls fell by 11,000, while the unemployment rate dropped to 10 per cent, the Labour Department said on December 4. Jobs had been forecast to decline 125,000, according to the median estimate of 82 economists surveyed by Bloomberg News. Gold fell 3.8 per cent on Friday, the biggest one-day drop since January 12.

After the report, traders boosted wagers the central bank will begin lifting its target rate for overnight loans next year. Federal-funds futures contracts on the Chicago Board of Trade show a 16 per cent probability the Fed will raise the target rate to at least 0.5 per cent by March, up from 8.3 per cent odds a week ago.

“Until more economic data is coming out of the States, we should wait and see,” Bob Takai, general manager of financial services at Sumitomo Corp, said on Monday in an interview on Bloomberg Television. “This correction in gold prices from just over $1,200 down to $1,160 was not a big surprise.”

The dollar has weakened this year as the Federal Reserve kept benchmark interest rates near zero percent since December 2008 in a bid to revive lending after the worst financial crisis since World War II. In the year to December 3, the Dollar Index sank 8.2 per cent, while gold rallied 37 per cent. The precious metal was boosted by increased buying from funds, individual investors and central banks.

The dollar was threatening “to form a base,” according to Jordan Kotick and other analysts with Barclays Capital in a December 4 report. Gold “remains vulnerable to further weakness,” they said. The Dollar Index today fell as much as 0.5 per cent.

Gold’s rally to an all-time high had pushed its 14-day relative strength index, a gauge watched by some investors as an indicator of direction, to more than 70 since November 13, the longest run in more than two years. Some analysts say that a reading of more than 70 is a signal that a decline is imminent. The index fell to less than 57 on December 4, and was at 53.5 on Monday.

Silver for immediate delivery dropped as much as 1.6 per cent to $18.2175 an ounce, and traded at $18.24. Palladium eased as much as 0.5 per cent to $370.50 an ounce, and platinum shed as much as 0.7 per cent $1,434.50 an ounce.