Gold Falls to Biggest Weekly Drop Since 1990 as Dollar Rallies
By Pham-Duy Nguyen
March 20 (Bloomberg) -- Gold futures fell, capping the biggest weekly loss since 1990, as the dollar rallied and traders pared bets on future cuts in U.S. interest rates by the Federal Reserve.
Interest-rate futures show a 58 percent chance the Fed will cut borrowing costs by 50 basis points to 1.75 percent next month, compared with an 82 percent chance yesterday. The Fed has cut the overnight lending rate six times since September, when it was 5.25 percent. Gold reached a record $1,033.90 on March 17, before losing as much a $100 this week.
``Gold can thank the Fed and the dollar for this monstrous sell-off,'' said Matt Zeman, a metals trader at LaSalle Futures Group Inc. in Chicago. ``Right now, we are in no man's land.''
Gold futures for April delivery fell $25.30, or 2.7 percent, to $920 an ounce on the Comex division of the New York Mercantile Exchange. The price fell 8 percent this week, the biggest weekly drop for a most-active contract since August 1990.
Silver futures for May delivery fell $1.595, or 8.6 percent, to $16.85 an ounce on the Comex, dropping 18 percent for the week. Silver still is up 13 percent this year, while gold has gained 9.8 percent.
The dollar rose as much as 1.1 percent against a basket of six major currencies, reaching 72.922. On March 17, the index fell to 70.698, the lowest ever, according to Bloomberg data.
Six-Month Rally
Gold had rallied as much as 38 percent since the Fed began cutting the overnight lending rate on Sept. 18 as a housing slump and credit-market losses threatened to usher in a U.S. recession. The cuts sent the dollar to all-time lows against the euro and boosted the value of commodities that are priced in the U.S. currency.
Oil, soybeans, platinum and wheat futures all rose to records this year. Demand for precious metals soared as investors purchased gold and silver contracts to hedge against the declining dollar and commodity inflation.
The UBS Bloomberg Constant Maturity Commodity Index of 26 commodities fell as much as 3.3 percent to 1,384.485 today, after reaching a record 1,573.838 on Feb. 29.
``The psychology of the market has moved manifestly against gold,'' said Dennis Gartman, economist and editor of the Gartman Letter in Suffolk, Virginia. ``The dollar is strong. The other commodities are weak. That is putting downward pressure on gold.''
Holdings in the StreetTracks Gold Trust, the biggest exchange-traded fund backed by bullion, fell 2.3 percent yesterday to 648.8 metric tons from a record 663.8 tons reached on March 17.
Gold may drop to $850 before investors return, said Stuart Flerlage, who helps manage more than $600 million at NuWave Investment Corp. in New York.
`Cyclical Correction'
``This is a cyclical correction in a long-term secular market,'' Flerlage said. ``The fundamental underpinnings for gold remain the same. Gold has been a fiat currency play in the last five years as investors put money into gold to diversify away from dollar-denominated assets.''
Gold climbed 31 percent in 2007, the seventh straight annual gain and the most since 1979, when the price more than doubled. Gold broke the record of $873 set in 1980 on Jan. 8. This is the fourth weekly decline the metal has had this year.
``This is the correction we've long been expecting,'' said Adrian Day, president of Adrian Day's Asset Management in Annapolis, Maryland. ``It was triggered by buyer exhaustion. I would not sell and look to be a buyer again.''
Gartman, who sold half of his positions in gold yesterday, told clients today that gold may set fresh records by year-end.
``We are certain that sometime later this year, we shall see gold, and the grains and perhaps even the base metals trading materially higher than where they had traded earlier this week,'' Gartman said.
