Daily Gold Update

Source: Marketwatch

San Francisco— Gold futures closed lower Tuesday for the first time in three sessions on concerns that China's demand for commodities in China may weaken, but prices finished well above the day's worst level as gains in oil futures and declines in the U.S. dollar fed safe-haven investment in gold.

Gold prices fell as much as $12 an ounce early on in the session after China hinted that it may tighten monetary policy, which could reduce demand expectations for commodities.

"With the strength that gold displayed in the last two weeks — knocking over resistance, consolidating briefly then edging up — the inherent strength of the market is showing itself, with investment demand leading the way," said Julian Phillips, an analyst at GoldForecaster.com, in e-mailed comments.

Gold futures for April delivery closed down $2.60 at $687.20 an ounce, staging a partial recovery from a low of $677.50. It climbed as high as $692.50 to mark a fresh seven-month, intraday high.

On Monday, the contract closed at its highest level since July as continued defiance by Iran over its nuclear program underscored the metal's safe-haven appeal. Prices have gained $6.80 over the past two sessions.

May silver fell 14.2 cents to end at $14.69 an ounce, but that's after a drop to $14.42. May copper lost 1.6%, or 4.5 cents, to close at $2.825 a pound.

Rounding out the metals action, June palladium fell by $4.90 to close at $356.60 an ounce but April platinum closed $11.30 higher at $1,253.30 an ounce.

For now, physical demand in the gold market is "unbelievable," said Neal Ryan, director of economic research at Blanchard, in e-mailed comments.

"Point to any news in the market and it's bullish for precious-metals prices moving forward," he said. The market just "needed to digest that physical selling in the London market."

Meanwhile, China was a key theme Tuesday after the Shanghai market closed down almost 9% overnight, its biggest single day decline in a decade. Concern that the government is planning restrictive measures to address fears of a bubble in the stock market and hints from the head of the central bank that it may tighten policy triggered the move.

Traders are concerned that measures that slow the Chinese economy will reduce demand for metals.

"A major downturn in Chinese equities markets and/or the Chinese economy could immediately and significantly affect the equally red-hot commodities sector (base metals, industrial materials, etc.)," said Jon Nadler, an investment-products analyst at bullion dealers Kitco.com, in e-mailed commentary.

"It could also affect some of the major global economies — that of the U.S., perhaps the most," he said. "Gold would likely not be immune from a large-scale decline in its own market sector 'backyard'."

Still, "in regards to the Chinese economy, let us not forget how many episodes we have gone through such speculation over the past few years," Peter Spina, chief investment strategist at GoldSeek.com said in e-mailed comments. "Until this event takes place, I would not throw all my weight behind such an occasion."

"Economic growth has been very aggressive and the Chinese government will continue to take measure to ensure growth is kept within check within their abilities," he said.

Providing some support to gold Tuesday, crude futures moved higher after more than $1 a barrel earlier in the session. Crude traders turned their attention to expectations for lower U.S. distillate and gasoline inventories, ahead of the Energy Department's update due Wednesday.

And in the currency market, the yen rallied sharply against the dollar as traders moved to unwind carry trades, in which investors borrow in a low-yielding currency like the yen, to invest in higher-yielding currencies.

On the supply side, gold inventories were unchanged at 7.49 million troy ounces as of late Monday, according to Nymex data. Silver supplies rose by 593,412 troy ounces to 116.6 million troy ounces, while copper supplies rose by 363 short tons to 36,994 short tons.

Stock indexes tracking the metals sector moved lower in tandem with the overall losses in metals prices Tuesday.

The Philadelphia Gold and Silver Index fell 4.3% to 141.46 points, the Amex Gold Bugs Index was at 345.64 points, down 4.5% and the CBOE Gold Index fell 4.5% to 147.24 points.

The DJ Wilshire Nonferrous Metals Index fell by 2.8% to 6,389.05 points, the DJ Wilshire Industrial Metals Index lost 3.6% to 3,666.13 points and the DJ Wilshire General Mining Index shed 5.5% to stand at 1,341.05 points.

Among the individual stocks, Freeport-McMoRan Copper and Gold dropped 7.6% to trade at $57.21. The sharp drop in mining stocks caused by China's stock market sell-off is "overdone," said Goldman Sachs analyst Hongyu Cai Tuesday, in a note reiterating her buy recommendation on copper miner Freeport-McMoRan.