March 29, 2011 / 4:12 AM / 9 years ago

Gold drops as monetary tightening comment weighs

NEW YORK (Reuters) - Gold fell for a fourth consecutive session on Tuesday as signs of central banks’ monetary tightening prompted selling, but the metal was underpinned by credit downgrades in Portugal and Greece and disappointing U.S. consumer confidence.

A gold bar is pictured during its stamping at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna February 28, 2011. REUTERS/Lisi Niesner

Bullion’s failure to capitalize on new record highs on recent strong volume suggested some investors are skeptical when central banks are about to rein in money supply to prevent inflation.

“In the short term, any rhetoric on money tightening could certainly cause some anxiety, resulting in gold prices correcting a bit, but I continue to see a significant underlying bid in gold as dips are being bought in the physical market,” said James Dailey, portfolio manager of the TEAM Asset Strategy Fund.

Spot gold dropped 0.1 percent to $1,417.46 an ounce by 3:36 p.m. EDT (1936 GMT), having earlier fallen as low as $1,410.85. U.S. gold futures for April delivery settled down 0.3 percent at $1,416.20.

COMEX gold futures were one of the most actively trading commodity markets, with volume topped 250,000 lots, one of the heaviest trading days year to date.

Dailey said that gold’s failure to rise further on strong volume is indicative of a significant amount of skepticism and bearishness toward the metal in a healthy bull market.

Still, growing expectations U.S. and euro zone monetary policy may tighten are weighing on gold prices, after Western air strikes on Libya and political unrest across the Middle East and North Africa pushed gold to a record $1,447.40 an ounce last week.

“I think the market is beginning to believe that there will be no QE3,” said Saxo Bank senior manager Ole Hansen. “We have geopolitical unrest, rising inflation, weaker dollar and all of these have failed to make gold fly like last year.”

St. Louis Federal Reserve chief James Bullard urged the Fed to begin reversing its campaign of monetary easing, saying it could trim its $600 billion bond-buying program by $100 billion, while ECB chief Jean-Claude Trichet said euro zone’s inflation rate was “durably” above the bank’s target.

Last November, the Fed initiated a $600 billion bond buying program — dubbed QE2 because it is the second round of quantitative easing — which is scheduled to end in June. Gold has been a major beneficiary since the Fed has kept short-term rates near zero since December 2008.

Also supporting gold was signs of a loss in momentum in the U.S. economy, with consumer confidence fell in March as households worried about inflation. In addition, Standard & Poor’s downgraded Greece and Portugal.

RATE HIKES EYED

The prospect of tightening monetary policy is casting a shadow over the gold outlook. Gold tends to benefit from low real interest rates, as they reduce the opportunity cost of holding non-interest bearing bullion.

“We expect that the strengthening U.S. economy combined with the end of quantitative easing by the U.S. Federal Reserve will lead to gradually rising U.S. real interest rates in 2011,” said Goldman Sachs in a report on Tuesday.

Gold demand to make jewelry, dental fillings and in electronics will jump by more than 5 percent this year, the biggest rise since 2000, metals research and consultant CPM Group said on Tuesday.

Investment interest in products such as precious metals exchange-traded funds has been soft this quarter, with holdings of the largest gold ETF, New York’s SPDR Gold Trust, on track for the biggest quarterly decline since the fund’s launch.

Holdings of the largest silver ETF, the iShares Silver Trust, are on track for a small rise, however, recovering after posting their biggest ever monthly outflow in January.

Silver slipped 0.3 percent to $37.02 an ounce, underperforming gold in its second straight session of losses.

Platinum dropped 0.4 percent to $1,738.24 an ounce, while palladium gained 1.2 percent to $750.72.

Prices at 3:36 p.m. EDT (1936 GMT)

Additional reporting by Jan Harvey in London; Editing by Lisa Shumaker

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