November 28, 2012 / 3:31 PM / in 5 years

PRECIOUS-Gold drops 1.5 pct on deflation fears, fund sales

* Big sell orders by funds, Dec-Feb contract rollover weigh
    * Fall not result of momentary pause or erroneous trade-CME
    * Holdings of biggest gold ETF hit record high
    * Coming up: U.S. preliminary Q3 GDP, pending home sales

 (Recasts, adds market details, updates prices)
    By Frank Tang
    NEW YORK, Nov 28 (Reuters) - Gold fell 1.5 percent on
Wednesday, its biggest one-day drop in nearly a month, as
deflation worries related to a U.S. fiscal crisis and
debt-stricken Greece triggered a heavy bout of stop-loss orders
from momentum-driven fund investors.
    After trading slightly lower in Asian dealings, bullion
prices suddenly plummeted $25 an ounce at the U.S. pit-session
open with an equivalent of more than 2 million ounces of COMEX
gold futures changing hands in less than five minutes. 
    There was market talk and speculation about a so-called "fat
finger" erroneous trade related to the contract rollover to
February from December before Friday's
first-notice day. A CME spokesman said the market sold off
without triggering a momentary pause which prevents price
    "I see a significant percentage of stop-loss orders being
triggered by algorithm traders. That could further accelerate
the declines as we see highly leveraged investors reduce
positions," said Jeffrey Sica, chief investment officer of Sica
Wealth, which manages more than $1 billion in assets. 
    A combination of funds' month-end profit taking long
liquidation after last week's rise and options-related selling
around expirations also pressured bullion, traders said.
    Spot gold hit a low of $1,705.64 an ounce, its lowest
price since Nov. 16. Later, it rebounded off its lows and traded
at $1,718.60, down 1.3 percent on the day, by 2:49 p.m. EST
(1949 GMT). 
    U.S. COMEX December gold futures settled down $25.80
at $1,716.50. 
    Trading volume was extremely heavy at nearly 440,000 lots,
more than doubled its 250-day average, preliminary Reuters data
showed, partly boosted by the December-February contract
rollover. It is on track to finish among the top three daily
turnovers in 2012.
    Gold's sell-off sent prices near recent lows between $1,703
and $1,705. Bullion could slide further due to a lack of chart
support if it breaks below that key support area, analysts said.
    (Graphic showing gold near recent lows:
    Liquidation by jittery investors who recently added to their
long positions following Friday's sharp rally also fuelled
Wednesday's rout. CME data showed open interest fell but the
gauge of market activity held near a record high reached earlier
this week.
    Even though a recession related to the $600 billion U.S. tax
hikes and spending cuts in the new year could severely undermine
gold's inflation-hedge appeal, the so-called U.S. fiscal cliff
could also boost underlying safe-haven bids, analysts said. 
    This was demonstrated by holdings of SPDR Gold Trust,
the world's largest gold-backed exchange-traded fund, which hit
a record high of 1,345.813 tonnes on Tuesday.
    Among other precious metals, silver fell in line with
gold but also rebounded off a one-week low at $32.89. It was
last traded 1 percent lower at $33.68 an ounce.
    Spot platinum was down 0.4 percent at $1,601.90 an
ounce, while spot palladium climbed 0.8 percent to
$670.50 an ounce.
 2:49 PM EST     LAST/    NET   PCT      LOW    HIGH  CURRENT
                SETTLE   CHNG  CHNG                       VOL
 US Gold DEC   1716.50 -25.80  -1.5  1705.50 1743.10  250,055
 US Silver DEC  33.684 -0.297  -0.9   32.900  34.040   85,795
 US Plat JAN   1611.70  -6.80  -0.4  1583.00 1616.90   10,714
 US Pall DEC    673.15   4.95   0.7   645.00  673.75    7,042
 Gold          1718.60 -23.05  -1.3  1705.64 1742.85         
 Silver         33.680 -0.340  -1.0   32.890  34.040
 Platinum      1601.90  -6.35  -0.4  1584.00 1612.00
 Palladium      670.50   5.29   0.8   648.75  671.50
 TOTAL MARKET              VOLUME          30-D ATM VOLATILITY
                CURRENT   30D AVG  250D AVG   CURRENT     CHG
 US Gold        438,508   162,544   176,243     13.63    0.46
 US Silver      154,715    50,048    56,340     21.03   -0.17
 US Platinum     11,129     8,663     9,487     17.94    0.12
 US Palladium    15,365     4,894     4,630                  

 (Additional reporting by Jan Harvey and David Brough; Editing
by Peter Galloway and Marguerita Choy)
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