Gold drops as demand for ‘paper’ form shrinks

Gold futures dropped on Wednesday as signs of weakening demand for the paper form of the metal offset safe-haven support from a slowdown in growth. Physical buying remains strong, but those who invest in the paper market look at it on a day-to-day basis. Central banks remain significant physical buyers, showing that the physical demand is strong.

By Myra P. Saefong and Carla Mozee
April 3, 2013, 12:53 p.m. EDT
Market Watch

SAN FRANCISCO (MarketWatch) — Gold futures dropped Wednesday as signs of weakening demand for the so-called paper form of the metal offset safe-haven support from a slowdown in growth among U.S. private payrolls in March.

Gold for June delivery GCM3 -1.38% fell $10, or 0.6%, to $1,565.90 an ounce on the Comex division of the New York Mercantile Exchange.

“There is a clear disconnect between the paper and physical market,” said Jan Skoyles, head of research at The Real Asset Co., a precious-metals investment platform provider.

Physical buying remains strong, but “those in the paper market look at this on a day-by-day basis and today gold doesn’t look as attractive as other asset classes,” she said. “Those interested in physical gold continue to buy, but expect the gold price to drop further and so are hanging back until it does so.”

The losses for gold futures came as shares of the SPDR Gold Trust GLD -1.39% fell 0.9% in afternoon dealings. Holdings in the largest gold ETF on the market fell to 38.9 million ounces Tuesday — down from 39.1 million on Monday. They were at 43.4 million ounces on Jan. 2.

Shares of the iShares Gold Trust IAU -1.42% also fell by 0.6% Wednesday.

Analysts have said that ETFs have transformed the gold market in the last decade following the introduction of the world’s first gold-backed ETF AU:GOLD -2.06% , launched in Australia.

For now, “demand for protection of wealth is ... not there so things don’t look too bright for the white metal,” said Fawad Razaqzada, technical analyst at GFT Markets, in a note.

At the same time, however, “demand for the metals in the physical form is there — as highlighted by reports that Turkey’s imports of silver surged more than 30% and that of gold climbed to an eight-month high in March,” he said.

“Central banks remain significant physical buyers. However, the paper market eclipses the physical, and at the moment the charts don’t looks too good,” he said.

Still, a sharp rise in gold demand in Asia has prevented gold from a total collapse Wednesday, according to Chintan Karnani, an independent bullion analyst based in New Delhi. “It is only gold ETF investors which are shunning gold and opting for other non-gold based assets and is the key reason for gold’s fall.”

“Fundamentals have been bearish for gold for the past one year but still it had managed to stay afloat,” he said.

Supportive factors

Gold prices had temporarily pared losses after data on private-payrolls growth showed a slowdown in March, helping to buoy the precious metal’s safe-haven appeal. Automatic Data Processing Inc. posted the smallest gain in growth since October.

Analysts said that the gold market, however, awaited the government’s jobs report, which will be released Friday. It includes information on both private and public-sector payrolls.

On Tuesday, gold prices fell sharply on Comex, giving up $25 to settle at $1,575.90 an ounce, the lowest settlement level for a most-active contract since March 7, according to FactSet data.

The precious metal was hurt by the greenback’s strength against the euro EURUSD +0.18% following disappointing data from Europe, including contraction in the euro-zone manufacturing sector in March.

On Wednesday, the dollar weakened against most of its currency rivals, including the euro, but gold failed to find support.

The greenback also lost ground against the yen USDJPY -0.69% as Bank of Japan officials gathered for a two-day monetary-policy meeting. Weakness in the dollar usually provides support for dollar-denominated commodities such as gold as it makes them cheaper for holders of other currencies to buy.

The ADP private-payrolls data weighed on the dollar, along with a slowdown in business for U.S. service-sector companies in March reported by the Institute for Supply Management.

Remaining under pressure Wednesday, silver futures for May delivery SIK3 -1.41% lost 38 cents, or 1.4%, to $26.88 an ounce. They fell to $27.25 an ounce on Tuesday, the lowest settlement level for a most-active contract since early August.

May copper futures HGK3 -1.51% shed 4 cents, or 1.2%, to $3.34 a pound. July platinum PLN3 -2.44% fell $20.70, or 1.3%, to $1,553.90 an ounce. June palladium PAM3 -2.27% shed $12.75, or 1.7%, to $756.65 an ounce.

For platinum and palladium, it seems to be a ‘risk-off’ day today, despite the positive auto sales numbers, said Tim Murray, general manager of precious metals marketing at Johnson Matthey. “Just a bad day at the office for commodities and precious metals across the board.”

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