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Stock Gains Spark Selling of Gold Futures

Markets: Price falls 2%, biggest one-day decline in a year. Metal's recent rally might resume, but gains may be limited by a decline in demand in India, its biggest user.

June 06, 2002|From Bloomberg News

Gold futures had their biggest drop in a year as a rally in U.S. stocks reduced the metal's allure as an alternative investment.

The Dow Jones industrial average rose for the first time in three days after an industry report showed the U.S. service economy grew more than expected in May.

The gain for stocks prompted selling of gold futures by speculators whose earlier buying contributed to an 18% rise for gold this year to a 4 1/2-year closing high Tuesday, traders said.

"With the stronger stock market, gold was primed to move lower," said George Dlugosh, vice president of precious metals trading at RBC Capital Markets in Toronto.

Gold for August delivery fell $6.60, or 2%, to $321.20 an ounce on the Comex division of the New York Mercantile Exchange, the biggest one-day decline since June 11, 2001. Prices still are up 21% from this time last year.

Shares of gold mining companies also fell. The Philadelphia gold and silver index of 10 mining companies dropped 2.9% to 83.09, but still is up 53% for the year.

Denver-based Newmont Mining Corp., the world's biggest gold producer, fell 36 cents to $31.20. The shares reached a four-year intra-day high of $32.75 on Tuesday.

The recent rally in gold prices was triggered partly by investors seeking an alternative to stocks.

All three of the major U.S. stock indexes are in the red so far this year following two years of losses.

Prices also were pulled higher by buying of the metal as a hedge against a possible disruption in financial markets if military tensions between nuclear powers India and Pakistan erupt into war.

Although the gold rally may resume in coming days, gains will be limited by a decline in demand for gold bars and jewelry, particularly in India, the biggest user of the metal, because of high prices, traders said.

"One day does not change the trend," said Jim Pogoda, a gold trader at Mitsubishi International Corp. in New York. "All of the bullish arguments for a higher gold price remain intact.

"I don't think prices will go much over $330 an ounce because of poor demand in India in the first quarter, and we're hearing the second quarter may be even worse," Pogoda said. Indian gold buyers "are very price-sensitive."

Indian gold demand in the first quarter totaled 149.8 metric tons, down 40% from a year earlier, the London-based World Gold Council said last month in a report.

Hedge funds and other speculators had bought 75,210 gold futures as of May 28, close to a nine-year high of 76,757 on May 7, a report Friday from the Commodity Futures Trading Commission showed. Wednesday's decline for gold accelerated as some speculators decided it was time to sell contracts and reduce their "long" position, traders said.

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