December 8, 2010 / 1:18 AM / 7 years ago

Gold falls for 2nd day as Treasuries extend rout

NEW YORK (Reuters) - Gold prices fell more than 1 percent for a second day on Wednesday as an extended fall in U.S. Treasury prices fueled profit-taking from bullion’s record run by investors seeking better yield returns.

Benchmark Treasury yields jumped to a six-month high for a second straight day, after a deal in Washington to extend tax cuts fueled fears of a swelling budget deficit. <US/>

The dollar also gained, buoyed by hope of improving U.S. economic growth as the effective tax stimulus filtered through.

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The combined effect of those factors drove profit-taking in precious metals, sensitive to both interest rates and the dollar. Gold has rallied 26 percent this year, while silver, which fell in tandem on Wednesday, has surged almost 70 percent.

“The positive view on U.S. growth engendered by the tax-cut agreement and the rest of the Obama and congressional Republican package triggered a surge in U.S. bond yields,” said James Steel, chief commodities analyst at HSBC.

“Higher rates will weigh on gold prices ... which could be vulnerable to a sharp sell-off as in the run-up to the holiday period trading volume is likely to diminish,” he said.

Spot gold traded at $1,382.79 an ounce, down 1.3 percent, at 2:33 p.m. EST (1933 GMT), having earlier fallen by as much as 2.1 percent to a one-week low of $1,371.45. U.S. gold futures for February delivery settled down $25.80 at $1,383.20 an ounce.

”It really is just good old-fashioned profit-taking,“ said Credit Agricole analyst Robin Bhar. ”This year every time gold makes a new high, it subsequently collapses.

“It is noticeable that we had quite an influx of momentum traders as well, as the price was moving higher, and they’re notorious for being short-term players.”

Adam Hewison, president of MarketClub.com, said that gold was likely to be on the defensive in the next 4 to 6 days as technical charts showed the current pattern is similar to the previous declines in November and October.

(Graphic: link.reuters.com/qev29q)

Technical selling also accelerated the decline in silver prices, which had jumped to a 30-year high above $30 an ounce, but investment interest remained high as the world’s largest silver-backed exchange-traded fund hit another record high.

Silver dropped 1.1 percent to $28.34 an ounce, causing the gold/silver ratio to stabilize hear a near-four year low.

(Graphic: link.reuters.com/kuv29q)

HAVEN NO MORE

Gold has lost some safe-haven appeal as, for the first time in weeks, euro zone debt concerns were placed on the back burner and investors focused on U.S. economic fundamentals in a thinning market.

Gold hit an all-time high at $1,430.95 an ounce on Tuesday, but has now fallen by about 4 percent after the rally ran out of steam.

Holdings in the No. 1 SPDR Gold Trust remained steady despite weaker gold prices, while the world’s largest silver ETF, iShares Silver Trust, said its holdings hit another record at 10,941.34 tonnes by Wednesday.

Setting gold on the back foot early in the day was a rally in the dollar, after the proposed extension in U.S. tax cuts prompted a spike in bond yields on Tuesday, which in turn raised the cost of holding gold to non-U.S. investors. <FRX/>

While gold has shaken off its traditional inverse relationship with the U.S. currency in the past when risk aversion has worsened, this has not been the case this week, when the negative correlation has strengthened.

“If you do get higher yields, the opportunity cost of holding a zero-yielding asset like gold is a bit of a concern, but it’s more of a currency play in the near term,” said RBS analyst Daniel Major.

The rise in Treasury yields was seen as being supportive to the dollar in the near term, while the tax deal itself could lift growth next year and lessen the case for bigger monetary stimulus by the Federal Reserve.

Platinum dropped 0.5 percent to $1,680.74 an ounce, while palladium slipped 0.2 percent to $728.50.

(Additional reporting by Amanda Cooper and Jan Harvey in London; Editing by Walter Bagley)

Prices at 2:35 p.m. EST (1935 GMT)

LAST/ NET PCT YTD

CLOSE CHG CHG CHG US gold 1383.20 -25.80 -1.8% 26.2% US silver 28.252 -1.525 -0.1% 67.7% US platinum 1681.40 -23.80 -1.4% 14.3% US palladium 728.95 -9.75 -1.3% 78.3%

Gold 1382.94 -17.92 -1.3% 26.1% Silver 28.34 -0.32 -1.1% 68.3% Platinum 1679.00 -9.50 -0.6% 14.6% Palladium 727.72 -2.25 -0.3% 79.5%

Gold Fix 1385.50 -9.50 -0.7% 25.5% Silver Fix 29.02 -148.00 -4.9% 70.8% Platinum Fix 1683.00 3.00 0.2% 14.8% Palladium Fix 729.00 8.00 1.1% 81.3%

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