Gold Heads for Worst Monthly Run Since 1997

February 28, 2013 at 07:17

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Gold headed for a fifth monthly decline in the longest run of losses since 1997 as investors reduced holdings by more than 100 metric tons on concern that U.S. stimulus may be curtailed as the economy recovers.

The metal reached $1,555.55 on Feb. 21, the lowest price since July, as some U.S. central bankers sought more flexibility on stimulus. Assets in bullion-backed exchange-traded products slumped to a five-month low of 2,508.53 tons yesterday and are poised to drop 4 percent this month, the biggest fall since April 2008. In volume terms, global holdings have dropped by 103.7 tons this month, more than five times the net sales in January.

Bullion is still 1.1 percent higher this week as volumes on the Shanghai Gold Exchange surged and data showed that Russia and Kazakhstan expanded gold reserves for a fourth month in January. U.S. Federal Reserve Chairman Ben S. Bernanke’s defense this week of the central bank’s asset purchases and political turmoil in Italy after an election also spurred demand.

“The bullion market now is focusing on the eventual withdrawal of monetary stimulus, compared to a year ago, when the market was more focused on expectations of further monetary policy easing,” James Steel, an analyst at HSBC Securities (USA) Inc., wrote in a note.

Bernanke said yesterday in the final of two days of testimony to U.S. lawmakers that the central bank may decide to hold bonds on its $3.1 trillion balance sheet to maturity as part of a review of its strategy for an exit from record monetary easing. The comments came before $85 billion in automatic federal spending cuts begin to take from tomorrow.

Gold rallied for 12 years through 2012 as investors sought a hedge against falling equities, weakening currencies and potential inflation. The MSCI All-Country World Index of equities has risen 4.2 percent this year and the Standard & Poor’s Index is near a record.

Gold is having a “troubling loss of momentum” and is no longer a buy-and-hold asset, according to Davis Hall, global head of foreign exchange and precious metals advisory at Credit Agricole SA’s private-banking unit. The cycle for gold prices has probably turned as the U.S. recovery gathers momentum and holdings drop, Goldman Sachs Group Inc. said in a Feb. 25 report.

Cash bullion of 99.99 percent purity on the Shanghai Gold Exchange lost 0.7 percent to 324.40 yuan a gram ($1,621.48 an ounce). Daily volumes for the benchmark cash contract have been more than double the average in 2012 since Feb. 18, when it reached a record 22,024 kilograms, according to exchange data.