Gold loses steam on US recession fears; silver slumps

Gold recoiled from a record high in heavy volume on Thursday, as mounting recession fears fed a global stock market maelstrom that forced investors to liquidate bullion profits to cover losses elsewhere.

As the global stock market sell-off accelerated and major US stock indexes tumbled 4 percent, safe-haven buying of gold quickly gave way to liquidation as investors scrambled to meet margins calls.

In an abrupt midday reversal, gold slid as much as $40 from an all-time high. This surprised some traders who had expected gold to extend its record run on new government currency and bond market interventions and a likely renewal of monetary easing by the Federal Reserve to revive the U.S. economy.

Silver slumped over 7 percent too in one of the biggest risk asset sell-offs since early 2009, while US Treasury prices and the dollar soared in tandem as holdings of last resort. Investors braced for a Friday US payrolls report that threatened to extend a run of gloomy economic data.

“You see the markets re-price all terms of risks and the dollar is rallying. So, I don’t see why gold would be a safe haven today,” said Jeffrey Sherman, commodities portfolio manager at DoubleLine Capital, which oversees $13 billion in assets.

“Gold looks completely out of steam. There is really no benefit to owning gold right now because it’s not that you are worrying about inflation yet. There could be some worries about government printing money but that’s not imminent anymore.”

Gold was down 0.6 percent at $1,651.40 an ounce by 3:33 PM EDT, having earlier hit a record $1,681.67. Gold mining stocks measured by the Arca Gold BUGS index . HUI slumped over 6 percent.

US gold for August delivery settled down $7.30 at $1,659 an ounce. Trading was frantic, with volume near 320,000 lots, set to be one of the strongest this year.

The sudden fall from bullion’s peak caused a surge in demand for options to protect bullish positions. Gold option volatility also spiked more than 12 percent to a 2011 high.

Silver plunged 7 percent to $38.76.

As investors fled stocks, the S&P 500 index slid into correction territory on mounting worry about the US economy and Europe. Oil tumbled 5 percent and other commodities also slumped broadly. The dollar index surged 1.5 percent while the yen fell sharply after Japan intervened.

“When you get outside markets down significantly, some investors liquidate their winning positions in the gold and silver market longs to raise margins and support their losing trades,” Phillip Streible, senior market strategist with futures broker MF Global.

Even as technical indicators showed the gold market was in overbought territory, most analysts said any pullback would be short-lived because there was enough safe-haven buying and economic fears to put a floor on prices.

“The only thing that would stop the momentum in gold at this point is an increase in margins. I bet that’s coming sooner or later,” said independent investor Dennis Gartman.

There was market chatter about an increase in margins for gold futures after bullion’s 12 percent rally since July. The CME Group, which runs the US futures market, has not made any announcement about a margin hike in gold or silver.

RALLY ON MONEY EASING VIEW FIZZLES

Early in the session, bullion hit its third record in four days on safe-haven demand after new US claims for unemployment benefits were little changed last week. A string of lackluster US data including disappointing manufacturing and private-sector jobs reports earlier this week also pointed to a halt in economic growth.

Bullion also hit all-time highs in euro, sterling and yen in early trading.

Gold initially benefited as the European Central Bank resumed buying governmentbonds, marking a fresh round of central bank money easing. The news failed to clam fears as Italian and Spanish bond yields climbed toward danger levels.

Investors are already jittery about a chaotic currency market after interventions by Japan and Switzerland, a possible downgrade to the US AAA credit rating and a widening euro debt crisis. The dollar and U.S. Treasury debt appeared to be the only winners across a broadly lower global markets.

Investor buying have underpinned bullion prices given concerns Europe and the United States may tip back into recession.

Holdings of the largest gold-backed exchange-traded-fund SPDR Gold Trust and the No. 1 silver-backed ETF iShares Silver Trust both rose 0.4 percent on Wednesday from a day earlier.

Platinum group metals fell in tandem with industrial commodities. Platinum dropped 2.9 percent to $1,724.75 an ounce, and palladium fell 5.4 percent to $748.47.

Reuters