PRECIOUS-Gold drops on profit taking, posts biggest weekly gain in 2 months

Fri Oct 18, 2013 2:20pm EDT

* Gold posts 3.3 percent gain for week
    * Rally loses steam as ETF holdings drop
    * Fed tapering seen key to gold's long-term direction
    * Coming up: US existing home sales Monday

 (Adds analyst comment, second byline, dateline, updates market
activity)
    By Frank Tang and Jan Harvey
    NEW YORK/LONDON, Oct 18 (Reuters) - Gold fell on Friday as
investors took profits after the previous session's 3 percent
rally on expectations the partial U.S. government shutdown will
lead the Federal Reserve to postpone tapering of its bond-buying
stimulus.
    The precious metal was up more than 3 percent for the week,
its biggest weekly gain in two months. Heavy short covering
boosted gold prices after the Congress clinched an 11th-hour
deal earlier this week to pull the world's biggest economy back
from the brink of debt default.
    However, gold's upward momentum faded on Friday, partly
after data showed holdings in the world's largest bullion
exchange-traded fund, SPDR Gold Trust, fell. 
    "It remains to be seen whether the investor community will
now restart their buying of various ETF's given that the Fed's
tapering intentions are now merely being postponed," said Edward
Meir, metals analyst at brokerage INTL FCStone.
    Gold-backed ETF holdings are often seen as a gauge of
investor interest.    
    Spot gold fell 0.4 percent to $1,313.68 an ounce by
1:41 p.m. EDT (1741 GMT).
    U.S. Comex gold futures for December delivery settled
down $8.40 an ounce at $1,314.60, with volume at just 100,000
lots, about 40 percent below its 30-day average, preliminary
Reuters data showed.  
    The metal leapt 3 percent on Thursday after the deal to
re-open the U.S. government and a downgrade to the country's
sovereign rating by a Chinese credit rating agency knocked the
dollar, prompting a rush among over-extended shorts to cover.
    "Once the government re-opened and the agenda moved on from
the debt crisis to next week's Federal Reserve meeting, that was
a trigger for gold to see some upside," Mitsubishi analyst
Jonathan Butler said.
    However, in the long run, gold is likely to sell off as soon
as talks of Fed tapering resume, Butler said.
    Gold's 20 percent drop this year has largely been after Fed
Chairman Ben Bernanke signalled earlier this year the central
bank's $85 billion monthly bond-buying scheme - which had driven
gold higher by keeping a lid on interest rates while stoking
inflation fears - will be tapered.
    
    ETF HOLDINGS DROP
    Investment interest in gold remained lackluster, as the SPDR
Gold Trust reported another 3.3-tonne drop in its holdings
on Thursday. 
    The fund posted a fourth straight week of outflows. Its
holdings have fallen more than 35 percent from their December
2012 peak, and are down nearly 3 percent this month. 
    Among other precious metals, silver edged up 0.1
percent to $21.87 an ounce. Platinum was up 0.1 percent
at $1,431.10 an ounce and palladium slipped 0.1 percent
to $737.72 an ounce.
 1:41 PM EDT     LAST/    NET   PCT      LOW    HIGH  CURRENT
                SETTLE   CHNG  CHNG                       VOL
 US Gold DEC   1314.60  -8.40  -0.6  1311.20 1328.90   92,468
 US Silver DEC  21.913 -0.034  -0.2   21.740  22.050   21,878
 US Plat JAN   1437.80   2.90   0.2  1429.00 1446.60    8,404
 US Pall DEC    740.65   2.85   0.4   733.00  742.55    4,447
                                                              
 Gold          1313.68  -5.41  -0.4  1312.23 1325.21         
 Silver         21.870  0.030   0.1   21.760  22.010
 Platinum      1431.10   1.20   0.1  1432.25 1440.74
 Palladium      737.72  -0.78  -0.1   736.77  740.00
                                                              
 TOTAL MARKET              VOLUME          30-D ATM VOLATILITY
                CURRENT   30D AVG  250D AVG   CURRENT     CHG
 US Gold         98,649   161,919   190,244     21.08   -0.49
 US Silver       22,481    44,446    56,457     32.11   -1.78
 US Platinum      8,462    14,365    13,017     22.19    0.00
 US Palladium     4,497     3,832     5,774                  
                                                              
 
 (Additional reporting by A. Ananthalakshmi in Singapore;
Editing by William Hardy, Pravin Char and Andrew Hay)