Gold falls as economic optimism boosts dollar

NEW YORK/LONDON Tue Mar 20, 2012 2:46pm EDT

1 of 3. Gold Bullion from the American Precious Metals Exchange (APMEX) is seen in New York, September 15, 2011.

Credit: Reuters/Mike Segar

NEW YORK/LONDON (Reuters) - Gold fell on Tuesday, on track to snap a three-day winning streak, amid selling prompted by lower crude oil and U.S. equity markets and a spate of positive U.S. economic data that eroded hopes of more U.S. monetary easing.

Spot gold narrowed its losses by 1:18 p.m. EDT/5:18 p.m. GMT to $1,652.21 an ounce from $1,660.40 late Monday, having slid by nearly 3 percent so far this month.

The COMEX April gold contract was down $20.1, or 1.2 percent at $1,647.1 per ounce.

The yellow metal, which has been following riskier assets such as stocks, also fell after a disappointing U.S. housing starts report.

"Money managers are reallocating capital into risk assets they had been shying away from, while liquidating some of their gold holdings (as) the economic picture painted in the first quarter has given reason to believe growth is on the right path," said Carlos Perez-Santalla, a trader at PVM Futures in New York.

Adding to the negative mood in gold was a sharp rise in benchmark 10-year U.S. Treasury yields, which have gained more than a third of a percentage point in less than a week. Both Treasury securities and gold tend to be sold when economic growth improves, traders said.

Gold's correlation with Treasuries has reversed in the last week, meaning the bullion price is now more likely to move in tandem with Treasury prices than against them.

"It's very much intraday movements related to the ups and downs of the dollar, which is setting the agenda for the time being," said Ole Hansen, senior manager at Saxo Bank.

The dollar gained against the euro and yen in quiet trade, while the Australian dollar tumbled on central bank hints of more room to ease and fears about China's growth. <USD/>

Lackluster physical and investment demand has pressured the metal, as a strike by India's jewelry industry entered a fourth day. They were opposing a sharp bullion import duty hike.

Gold losses were further sparked by declines in the world's largest gold exchange-traded funds. Holdings of gold in the world's major ETPs saw their largest one-day outflow in two months on Tuesday, falling by over 56,000 ounces to 70.843 million ounces. <GOL/ETF>

Gold's 3 percent decline last week erased gains won in January on hopes of further U.S. monetary easing. On Tuesday, a top Fed official said the U.S. central bank has not yet decided whether to embark on a third round of quantitative easing, or QE3. <ID: nL1E8EJ6T6>

Some buyers remained on the sidelines as they waited to see if Congressional testimony by Fed Chairman Ben Bernanke on Wednesday offers new clues about further easing, traders said.

"We are going to see a bumpy ride over the coming weeks, but I think investors eventually will step up to the plate. Rising bond yields are not going to be looked upon lightly by the Fed and some kind of (central bank) action could be the result, which will support gold," said Saxo Bank's Hansen.

Despite Tuesday's drop, gold options suggest some investors remain bullish as they are buying deep out-of-the-money call spreads and call options, or the right to buy gold futures.

This move follows recent heavy purchases of puts, or the right to sell gold, to protect downside risk against their long futures position, said Jonathan Jossen, a COMEX gold options floor trader.

Analysts said, however, that gold could test its December lows as some funds appear to have closed out of their bullish gold bets, fearing the Fed may have finished with quantitative easing.

In late December, gold fell toward $1,500 an ounce, after a more than 20 percent drop from an all-time high above $1,920 in September. Gold is still up more than 5 percent this year.

YIELD APPEAL

A rise in yields increases the appeal of the U.S. dollar for foreign investors, which in turn delivers a double blow to gold. The precious metal tends to fall when the dollar strengthens as non-U.S. investors sell bullion holdings to take greater profit on positions in their local currencies.

When interest rates are low, investors forfeit less of a premium for holding gold, which bears no yield or dividend, rather than stocks or bonds. An environment of rising rates increases this opportunity cost.

Citing high liquidity, low interest rates and sovereign debt concerns Anne-Laure Tremblay, an analyst at BNP Paribas, said while headwinds still exist for gold in the short-term, she maintains her price forecast for this year at $1,850.00/oz.

In other precious metals, silver fell by 3.8 percent to $31.96 an ounce, while U.S. May silver futures were down 1.12 cents at $31.805.

Platinum fell 1.5 percent to $1,649.24 an ounce, while palladium was down 2.1 percent to $687.05 an ounce.

Prices at 2:15 p.m. EST (1815 GMT)

LAST/ NET PCT YTD

CLOSE CHG CHG CHG

#VALUE! US silver 31.805 -1.121 0.0% 13.9%

#VALUE! US palladium 695.55 -10.55 -1.5% 6.0%

Gold 1648.59 -11.81 -0.7% 5.4% Silver 31.96 -1.26 -3.8% 15.4% Platinum 1649.24 -25.29 -1.5% 18.4% Palladium 687.05 -14.88 -2.1% 5.3%

Gold Fix 1656.75 8.25 0.5% 5.2% Silver Fix 32.22 -22.00 -0.7% 14.3% Platinum Fix 1656.00 8.00 0.5% 19.9% Palladium Fix 699.00 2.00 0.3% 9.9%

(Additional reporting by Amanda Cooper; Editing by Alison Birrane; Editing by Bob Burgdorfer)

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