Precious Metals Drop, Almost $2 Billion Wiped From Funds

London (Nov 5)  Gold to platinum tumbled as the dollar’s advance to a five-year high cut demand, wiping almost $2 billion from the value of precious metals-backed funds.

Gold and silver slid to four-year lows as the Bloomberg Dollar Spot Index climbed after Republicans gained control of the Senate from the Democrats in U.S. midterm elections and Bank of Japan Governor Haruhiko Kuroda said he saw no limit to the steps the BOJ may take to defeat deflation. About $1.94 billion was erased from the value of precious metals exchange-traded product holdings today.

The Federal Reserve is moving closer to raising interest rates just as other central banks seek to spur their economies. Rising rates cuts gold’s allure because bullion generally offers investors returns only through price gains, while a stronger dollar typically curbs demand for a store of value. Gold futures are set for the first back-to-back annual drops since 1998 and the slump is causing losses for some higher-cost mining firms.

The Rise and Fall of Gold »

“As long as the U.S. economy stays on track and the dollar remains strong, the metals will continue to stay under pressure,” David Govett, head of precious metals at Marex Spectron Group in London, said in a note. “The only positive in a sea of precious negativity is the fact that the markets are getting themselves shorter and shorter the lower we go. At some point there will be a short-covering move,” he said, referring to closing out bets on lower prices.

Gold for December delivery slipped 2.3 percent to $1,140.90 an ounce by 7:34 a.m. on the Comex in New York. It reached $1,137.10, the lowest price since April 2010. Bullion for immediate delivery slid 2.3 percent to $1,141.60 in London, according to Bloomberg generic pricing.

Trading Volume

Futures trading volume was triple the average for the past 100 days for this time of day, data compiled by Bloomberg show.

Silver’s 30-week correlation coefficient to gold is at 0.87, with a reading of 1 signaling the two moved lockstep in the same direction. The link between gold and platinum is at 0.64, while gold and palladium’s correlation is at 0.27.

Holdings in gold-backed exchange-traded products fell 3.7 metric tons to 1,643.4 tons yesterday, the lowest since August 2009, data compiled by Bloomberg show. Assets in the SPDR Gold Trust, the biggest ETP, are at the lowest since September 2008, when Lehman Brothers Holdings Inc. collapsed. The value of precious metals holdings has dropped to about $75.6 billion from $97.4 billion in March.

Falling oil prices and the end of the Fed’s bond buying as the economy strengthens have diminished demand for the metal as an inflation hedge. The Labor Department is forecast to report on Nov. 7 that nonfarm payrolls rose 232,000 last month and the unemployment rate held at 5.9 percent.

Gold’s Drop

“The gold market is unhappy and demand for gold is softening,” Howie Lee, an investment analyst at Phillip Futures Ltd., wrote in an e-mail. “The lack of investment demand due to a strong dollar and potential higher rates have been well chronicled. On the physical buying end, buyers are still waiting for prices to fall further.”

Gold’s drop last week took it below production costs for five of 19 mining companies tracked by Bloomberg Intelligence, meaning they’re losing money on every ounce mined. Three more producers were within $50. As gold climbed to a record $1,921.17 in 2011, mining costs were allowed to spiral and mines were built assuming high prices, said Mike Schroder, a fund manager at Old Mutual Investment Group in Cape Town.

Silver for delivery in December sank 4.5 percent to $15.235 an ounce in New York, and reached $15.12, the lowest level since February 2010. Silver ETP holdings dropped 101.3 tons yesterday, the most since Oct. 8, data compiled by Bloomberg show.

Platinum for January delivery fell 1.9 percent to $1,201.50 an ounce, and touched a four-week low. Palladium for delivery in December retreated 3.9 percent to $760.10 an ounce.

Source:  Bloomberg