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Gold hits two-week low on dollar rally, China
Frank Tang and Veronica Brown
Wed Jan 20, 2010 3:55pm EST
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NEW YORK/LONDON (Reuters) - Gold hit a two-week low on Wednesday, losing over 2 percent as a resurgent dollar and China's tightening bank lending decreased bullion's appeal as a hedge against both inflation and currency depreciation.

China

Analysts said the fact that gold did not fall further showed strong underlying investor interest, and fresh buying could reemerge after a healthy price pullback.

News that China's raising bank reserve ratio has triggered flight-to-quality buying into the dollar, prompting commodities investors to sell after prices had overshot due to economic optimism, said Adam Klopfenstein, senior market strategist at Lind-Waldock in Chicago.

"Even if gold goes to a one- or two-day market correction, there is still a lot of pent-up demand in gold. People are going to look at these dips as buying opportunities," he said.

Spot gold hit a low of $1,107.80 an ounce, the weakest since January 4. It was last at $1,113 an ounce at 2:21 p.m. EST, down from $1,137.95 quoted late in New York on Tuesday.

U.S. gold futures for February delivery settled down $27.40, or 2.4 percent, at $1,122.60 on the COMEX division of the NYMEX.

External headwinds were gathering for world markets, with Chinese banking authorities instructing some major banks to stop new lending for the rest of January after loan growth surged in the first few weeks of the year.

Even after gold futures broke below key support under its 14- and 50-day moving averages, they ended off session lows, which is a positive technical indicator, Klopfenstein said.

Gold prices were also pummeled as the U.S. currency hit five-month highs against the euro on heightened concerns about Greece's ability to finance its budget deficit.

The dollar, which usually moves in opposition direction to bullion, also rallied on expectations that the election of a Republican to a U.S. Senate seat might see the government rein in spending and cut the fiscal deficit.

Commerzbank analyst Eugen Weinberg said that gold is expected to test a low of $1,000 an ounce by the second quarter due to weak jewelry demand, but could rise toward $1,200 in the second half of this year because of its role as a hedge against market risk.

PLATINUM TAKES GOLD'S LEAD

Platinum prices also retreated, falling from a 17-month peak earlier in the session, with positive sentiment from the recent launch of new exchange-traded funds overrun by a resurgent dollar.

Spot platinum rose as high as $1,654, a level last seen in August 2008, but the dollar's strength pulled prices back to a last quote of $1,627.50, down from $1,643 late in New York on Tuesday. It traded as low as $1,592.50 earlier in the session.

A U.S. subsidiary of London's ETF Securities launched platinum and palladium exchange-traded funds earlier this month, and metals uptake by both funds has been healthy.

Holdings of ETFS Physical Platinum Trust rose to 144,924 ounces on Tuesday from 119,941 ounces on Monday, while ETFS Physical Palladium Trust also climbed to 194,977 ounce from 124,897 ounces during the same period.

"We still see decent support for platinum and we can't see anything that should see massive selling. Mainly it's the ETFs but also from possible supply problems in South Africa," said Walter de Wet, an analyst at Standard Bank in London.

Platinum's sister metal palladium rebounded on bargain hunting, and was last at $465.50, up from $464.50 late in New York on Tuesday.

Spot silver followed gold's lead, falling to $17.90 per ounce, down from $18.73 an ounce late in New York on Tuesday.

(Additional reporting by Miho Yoshikawa in Tokyo and Michael Taylor in London; Editing by Marguerita Choy)

http://www.reuters.com/article/idUSTRE5B10OV20100120