Gold, bonds sell off; stocks, dollar gain

NEW YORK Wed Aug 24, 2011 6:45pm EDT

U.S. Federal Reserve Chairman Ben Bernanke testifies before the Senate Banking, Housing and Urban Affairs Committee hearing on Enhanced Oversight After the Financial Crisis: The Wall Street Reform Act at One Year on Capitol Hill in Washington, July 21, 2011. REUTERS/Yuri Gripas

U.S. Federal Reserve Chairman Ben Bernanke testifies before the Senate Banking, Housing and Urban Affairs Committee hearing on Enhanced Oversight After the Financial Crisis: The Wall Street Reform Act at One Year on Capitol Hill in Washington, July 21, 2011.

Credit: Reuters/Yuri Gripas

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NEW YORK (Reuters) - Gold sold off in the biggest one-day percentage drop since December 2008, during the financial crisis, while the dollar rose on Wednesday on bets a speech by Fed Chairman Ben Bernanke later this week will not reveal any major initiatives.

Government bonds, which like gold rallied dramatically in recent weeks, fell sharply as investors withdrew from a broad range of safe-haven assets. World stocks posted solid gains for a second day.

Investors focused on raising cash because of the uncertainty ahead of Bernanke's speech to fellow central bankers in Jackson Hole, Wyoming, on Friday.

Wednesday's trading was not a typical move from one asset class to another, and cash raised was not immediately poured into stocks or other riskier assets like oil. Stocks rose, but on average volume.

"Markets are looking forward to Bernanke and Jackson Hole and are increasingly reluctant to carry risk into the speech in coming days," said Brad Bechtel, managing director and head of sales at Faros Trading in Stamford, Connecticut.

U.S. stocks flipped between positive and negative territory for much of the day, but ended with 1 percent gains on the S&P 500 as investors jumped back into beaten-down financial shares. Gold-related exchange-traded funds and shares dropped, however.

Markets have been in turmoil for the past month, weighing another possible U.S. recession and the impact of the euro zone debt crisis on the global economy. Benchmark stock indexes are on track for their worst month since the fall of 2008, after the collapse of Lehman Brothers investment bank.

Investors had been hoping for additional action from the U.S. central bank to help, but a more likely outcome may be just gradual measures.

For gold investors, analysts said it was time to take money off the table after a safe-haven rally extended too far, too fast in recent weeks. Bullion had been up by as much as $400 per ounce since July.

Spot gold dropped 4 percent to end at $1,750.55 per ounce.

U.S. gold futures for December delivery settled down $104 at $1,757.30 an ounce.

"You have a commodity that retail investors, hedge funds and everybody were long, and the technical indicators showed it was overbought. It was just a matter of time before the market starts cracking," said Mihir Dange, COMEX gold options floor trader for Arbitrage LLC.

ETFs tracking gold stocks and gold-mining stocks fell after the drop in bullion futures. The SPDR Gold XTrust Index (GLD.P) lost 3.4 percent, while the Market Vectors Gold Miners Index (GDX.P) fell 2.5 percent.

Among gold-related shares, Barrick Gold (ABX.N) dropped 3.3 percent to $48.99, Goldcorp Inc (GG.N) fell 3.6 percent to $49.44 and Kinross Gold (KGC.N) lost 1.9 percent to $16.74.

The dollar rose, but traders said they saw little conviction behind the gain. The dollar .DXY was last up 0.2 percent against a basket of currencies.

While investors have speculated Bernanke could signal a new monetary offensive to support the faltering U.S. economy, many analysts say he could well disappoint those looking for a big bang approach such as a third round of Treasury bond buying, or "quantitative easing," dubbed QE3.

"I think some of the dollar buying is based on the idea that Bernanke won't be too aggressive just yet," said Kathy Lien, head of research at GFT Forex in New York.

BOND PRICE DROP

Bond losses accelerated in afternoon trading despite a decent response to a $35 billion auction of five-year Treasury notes, part of this week's $99 billion in coupon-bearing supply.

The benchmark 10-year Treasury note was last down 40/32 in price and yielding 2.29 percent, up from 2.16 percent late on Tuesday.

The U.S. stocks' gain followed a rally in both world and U.S. stocks on Tuesday. The S&P 500 is still down 12.5 percent since July 22, roughly the start of the recent sell-off.

"Whenever you have waterfall decline like we did, historically you'll get a nice bounce," said Linda Duessel, market strategist at Federated Investors in Pittsburgh.

Among factors supporting stocks was data showing better-than-expected U.S. durable goods orders, along with a U.S. Congressional Budget Office prediction of a decline in the deficit as a result of the government's recent debt-reduction agreement.

World stocks as measured by MSCI .MIWD00000PUS were last up 0.7 percent.

At the close, the Dow Jones industrial average .DJI was up 143.95 points, or 1.29 percent, at 11,320.71. The Standard & Poor's 500 Index .SPX was up 15.25 points, or 1.31 percent, at 1,177.60. The Nasdaq Composite Index .IXIC was up 21.63 points, or 0.88 percent, at 2,467.69.

The S&P financial index .GSPF jumped 2.8 percent.

The FTSEurofirst 300 index .FTEU3 of top European shares gained for a third straight session to end up 1.4 percent.

In the oil market, Brent crude oil futures pared gains in late trading on uncertainty over Bernanke's speech but ended higher. In London, ICE Brent crude for October delivery settled at $110.15 a barrel, rising 84 cents, or 0.77 percent.

U.S. crude for October delivery settled at $85.16 a barrel.

(Additional reporting by Frank Tang, Ashley Lau, Wanfen Zhou and Steven Johnson in New York; Editing by Dan Grebler)

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