April 19, 2010 / 12:42 AM / 10 years ago

Gold drops but off lows; eyes Goldman fallout

NEW YORK (Reuters) - Gold finished nearly flat on Monday after dropping again on caution about potential fallout from fraud charges that U.S. authorities have leveled at leading commodities player and investment bank Goldman Sachs Group Inc (GS.N).

A man displays gold bars at SJC gold factory in Ho Chi Minh city January 22, 2010. REUTERS/Kham

Many financial markets sold off on Friday after the U.S. Securities and Exchange Commission charged Goldman Sachs with fraud by over its marketing of a subprime mortgage product.

Investors took the opportunity to cash in profits on gold, which has rallied about $100 since early February. Gold tumbled 2 percent on Friday and fell to a two-week low in early trading on Monday, but recovered to finish with only slight losses.

“Everybody’s on the side caution, looking to see if there is another shoe to drop,” said Bruce Dunn, vice president of trading at New Jersey-based Auramet Trading.

Many in the gold market voiced concern over the SEC’s allegation that Paulson & Co, a $32 billion hedge fund run by billionaire John Paulson, worked with Goldman in creating a collateralized debt obligation. Paulson was not charged.

The fact that gold prices finished on Monday without further sharp losses quelled speculation that Friday’s selloff was related to any liquidation by Paulson, traders said.

Spot gold was at $1,135.55 an ounce at 2:42 p.m. EDT (1842 GMT), down a touch from $1,136.45 late in New York on Friday. Earlier, it hit a two-week low of $1,123.15.

U.S. June gold futures settled down $1.10, or 0.1 percent, at $1,135.80 an ounce on the COMEX division of the NYMEX.

Dunn also cited lingering concerns about debt-laden Greece and expectations that China could raise rates.

Gold hit a two-week low early, but recovered as the dollar cut gains against the euro and as investors covered short positions after Friday’s 2 percent sell-off.

Analysts said bullion investors were also nervous about potential currency volatility, after China’s President Hu Jintao said the country remained on course to gradually put in place a managed floating exchange rate system.

“In the near term, we expect the developments surrounding Goldman to overshadow all other issues that previously dominated gold trading, including the pace and tempo of the economic recovery and its impact on monetary policy (and) the possibility of a Chinese yuan revaluation,” said HSBC in a note.

FUTURES MARKET OVERBOUGHT?

However, a rapid rise in speculative net long positions in the U.S. futures market, according to the latest trade data by the Commodity Futures Trading Commission, is worrying some analysts due to further profit taking in the short term.

“As we enter a new week, particularly following a negative weekly close, the focus of investor positioning in the gold market comes further under the spotlight,” UBS analyst Edel Tully said in a report on Monday.

“There is little doubt that such positioning is bordering on crowded,” she said. “So long as risk aversion remains in place, the danger is that gold longs will run for the exit as fast as they entered over the previous two weeks.”

Other precious metals also rose in line with gold’s recovery, with silver at $17.72 an ounce against $17.67.

Platinum was at $1,694.50 an ounce against $1,690, while palladium was at $532 against $528.50.

The market will be watching a platinum/palladium report due Thursday by respected metals consultant GFMS Ltd.

The market will watch U.S. producer prices data, due for release on Thursday at 8:30 a.m. EDT (1230 GMT). Analysts expect a 5.8 percent year-to-year increase in producer prices in March, or a 0.9 percent increase when food and energy costs are excluded.

Additional reporting by Svea Herbst-Bayliss in Boston and Jan Harvey in London; Editing by David Gregorio

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