Gold May Drop on Europe Optimism

By Nicholas Larkin and Glenys Sim - Sep 26, 2011 9:19 PM GMT+0700

Gold slid below $1,600 an ounce and headed for the biggest two-day slump in a month, while silver erased its gains this year, as some investors sold the metals to cover losses in other assets. Bullion futures dropped more than margin requirements for a second consecutive day.

The euro slumped to an eight-month low versus the dollar on concern European policy makers are struggling to resolve the debt crisis as the region’s economy slows. Commodities touched the lowest level since December and global equities were near the lowest in more than year. The value of a 100-ounce futures contract traded in New York dropped $10,190 on Sept. 23, more than the $9,450 margin requirement that day, prompting margin increases.

“Gold is one of the few assets that remain in positive territory this year, in a sense it is one of the last assets standing, and because of this as investors head for cash they sell the assets that have performed,” Edel Tully, a London- based analyst at UBS AG, wrote today in a report. “While gold’s retracement was not really a surprise, the depth of its plunge certainly was.”

Gold for December delivery fell as much as $104.80, or 6.4 percent, to $1,535 an ounce, the lowest since July 8, and was at $1,619.30 by 9:57 a.m. on the Comex in New York. It’s down 7 percent since Sept. 22. Immediate-delivery gold was 2.8 percent lower at $1,618.95 in London.

Silver for December delivery fell as much as 13 percent to $26.15 an ounce, the lowest price since Nov. 18, and was last at $28.885. It’s down 6.6 percent this year after climbing as much as 61 percent when it touched a 31-year high of $49.845 on April 25.

Central Bank Purchases

Gold is in the 11th year of a bull market, the longest winning streak since at least 1920 in London. Futures reached a record $1,923.70 on Sept. 6 as investors sought to diversify away from equities and some currencies. Central banks are adding to reserves for the first time in a generation, joining billionaire investors including John Paulson in hoarding gold.

CME Group Inc. increased the margin requirements on gold and silver trading after prices plunged. The minimum cash deposit for gold futures will rise 21 percent to $11,475 per 100-ounce contract at the close of trading today, CME said on Sept. 23. The minimum cash deposit for silver was raised 16 percent to $24,975. Margin increases may help steady prices, said James Steel, an analyst at HSBC Securities USA Inc.

Failure to combat the Greek-led debt crisis threatened “cascading default, bank runs and catastrophic risk,” U.S. Treasury Secretary Timothy F. Geithner warned euro-area leaders at the annual meeting of the International Monetary Fund. German Chancellor Angela Merkel said euro-region leaders must erect a firewall around Greece to prevent contagion.

Next Tranche

Euro-region finance ministers won’t be in a position to decide on the disbursement of the next tranche of aid to Greece when they meet on Oct. 3 because a report by the IMF, European Central Bank and European Commission has been delayed, German Deputy Finance Minister Joerg Asmussen said yesterday.

“A rising fear factor coupled with sinking confidence levels should be helping gold, but this isn’t happening because of overriding concerns about liquidity, European bank funding and margin calls amid a stronger U.S. dollar,” UBS’s Tully said. Physical demand and investor buying after recent declines may “point to a floor being nearby,” she said.

The Standard & Poor’s GSCI Index of 24 commodities declined as much as 2.6 percent today. The MSCI All-Country World Index of shares has plunged 23 percent since touching this year’s high on May 2.

Hedge Funds

Hedge funds and other large speculators trimmed their net- long gold positions by 11 percent to 150,529 contracts in the week to Sept. 20, data from the U.S. Commodity Futures Trading Commission showed. Gold exchange-traded-product holdings fell 0.4 metric ton to 2,235.6 tons on Sept. 23. Assets reached a record 2,298.4 tons on Aug. 8, Bloomberg data show.

The decline in speculative positions “may mean that short- term longs are being cleaned out of the market,” said HSBC’s Steel. “This could leave bullion well-placed to trade higher when the current selling cycle winds down.”

An ounce of gold bought as much as 60.4 ounces of silver in London, the most in almost a year, data compiled by Bloomberg show. That ratio may extend to 70, UBS said. Silver’s slump shows it “is not suited as a store of value and is behaving more like an industrial metal,” Commerzbank AG analysts wrote today in a report.

Platinum for October delivery slipped as much as 8.5 percent to $1,475.30 an ounce, the lowest since May last year, and was last at $1,568.40. Palladium for December delivery was down 1.9 percent at $630.20 an ounce. It earlier today fell to $605, the lowest level since October.

To contact the reporters for this story: Glenys Sim in Singapore at gsim4@bloomberg.net; Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net