Gold falls for 4th day on China inflation talk

NEW YORK/LONDON (Reuters) - Gold prices fell for a fourth straight session on Wednesday, although stabilizing somewhat a day after a 2 percent sell-off, as fears that China may take aggressive measures to curb inflation pressured gold and commodities.

A 999.9 fine gold 100 troy ounce Engelhard gold bar is seen on the floor of the New York Stock Exchange in New York, November 9, 2010. REUTERS/Shannon Stapleton

Gold has now notched its biggest four-day loss since early December as it has been punished in sync with other commodities by investors’ need to liquidate positions amid increasing margin calls, a rising dollar and fear of more aggressive tightening measures in China.

“Gold investors are afraid that China is going to put in these price controls to clamp down on inflation and to raise interest rates. So, the news cooled off speculation in the gold market a bit,” said Donald Selkin, chief market strategist of National Securities Corp.

Analysts said China’s measures to control consumer prices, and possibly to raise interest rates, could constrain commodity demand or drain liquidity from domestic markets.

While China’s monetary policy has rarely had a long-term impact on commodities, investors have used it as an opportunity to move out of some riskier assets, cashing in some commodity profits before the year-end.

The Reuters-Jefferies CRB .CRB index has dropped more than 7 percent in five days, its biggest fall in 16 months, while the Shanghai Composite Index .SSEC has slumped 10 percent in four days of losses.

Spot gold dropped 0.4 percent to $1,334.70 an ounce at 3:04 p.m. EST (2004 GMT). U.S. gold futures for December delivery settled down $1.50 at $1,336.90 an ounce, with volume largely in line with their 250-day average.

Silver edged up 0.2 percent to $25.52 an ounce

COMEX open interest in both gold and silver futures rose less than 1 percent on Tuesday, a day when both markets tumbled, suggesting some investors might have opened new short positions, or bearish bets.

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Gold has shed more than 6 percent since hitting a record $1,424.10 as the rebound in the dollar has triggered a torrent of selling across the commodities complex.

Tame U.S. inflation also weighed on gold. The core consumer price index touched a record low in October and new home building sagged, lending support to the Federal Reserve’s move to boost the sluggish economy through additional monetary easing.

Rising concern over Ireland’s ability to repay its debt has pushed the euro to seven-week lows against the dollar, but the greenback’s strength is offsetting any potential safe-haven flows into gold, such as those seen in May, at least for now. <FRX/>

Wednesday’s drop marked gold’s longest stretch of consecutive daily losses in five months, but it has not suffered to the same extent as other raw materials.

“It’s performed reasonably well in the correction relative to, for example, some of the base metals. Gold is only off about 6.5 percent from the high. Compare that to something like zinc, for example, which has plunged and is now down about 20 percent from the recent highs,” said Credit Suisse analyst Tom Kendall. “That reinforces the defensive qualities of gold and its diversification benefits.”

Bullion prices remain under pressure from weakness in commodities overall, with oil and base metals being heavily sold following talk China might raise interest rates to cool growth.


Gold is also suffering from the strength of the dollar, with which it usually maintains a negative relationship.

This inverse correlation has strengthened in the past two days, after having weakened almost continuously for the past month as concern about the euro zone drove investors into both gold and the dollar.


Euro zone sovereign risk could also prove a big support factor for gold. Ireland has pledged to work with a European Union-IMF mission on steps to help a stricken banking sector.

When worries over euro zone debt levels first came to the fore in the second quarter, it sparked a surge in investment demand for gold and pushed prices to then-record highs as investors fretted about the stability of paper currencies.

Platinum fell 0.6 percent to $1,629.50 and palladium gained 2 percent to $652.22.

Additional reporting by Jan Harvey in London and Laura MacInnis in Geneva; Editing by Walter Bagley