Gold sank about 3 percent on Tuesday to its lowest level in almost two months as an unusually large trade in the New York futures market rattled investors already edgy over a partial shutdown of the U.S. government.
Bullion fell abruptly in early U.S. trading as a massive Comex sell order appeared to overwhelm the market, sending prices $25 an ounce lower and triggering further technical stop-loss selling below $1,300, analysts said.
Silver, copper and crude oil also fell at the same time, although not as sharply.
The early activity stirred market talk of forced liquidation by a distressed commodities fund and of selling related to a fund rebalancing on the first day of the third quarter, although no details could be confirmed. Other traders said the decline was fueled by disappointment that the U.S. government shutdown had failed to trigger a rally in safe-haven bullion.
"Because we had such a significant run-up in the second quarter, money managers want to book their quarterly profit, especially with the tremendous amount of volatility," said Jeffrey Sica, chief investment officer of Sica Wealth Management, which has over $1 billion in client assets.
Yet profit-taking did not seem to fully explain the sudden drop between 8:30 and 8:40 a.m. EDT to an intraday low of $1,284 an ounce, with volume of some 24,000 lots changing hands in 10 minutes — about a fifth of the market's trading activity at the time.
U.S. Comex gold futures for December maintained those losses throughout the session, settling down $40.90 at $1,286.10, with total trading volume about 20 percent above its 30-day average, preliminary Reuters data showed.
Spot gold fell 2.8 percent to $1,289.51 by 3:12 p.m. EDT (1912 GMT), having earlier hit $1,282.59, its lowest price since Aug. 7.
The decline appeared to be specific to gold, with the dollar little changed and U.S. equities rising almost 1 percent in a show of some resilience amid the government shutdown.
Jonathan Jossen, a Comex gold options floor trader, said selling related to huge bearish bets in December put options might have also pressured gold futures.
Bullion posted a 7.6 percent gain for the third quarter, the first quarterly rise in a year, rebounding from a record 23 percent plunge in the second quarter. It is still down some 23 percent on the year after a two-day $225 drop in April.
Some investors had anticipated gold prices would rally further on uncertainty related to the government shutdown, as a prolonged closure could derail the U.S. economy's tentative recovery. Up to 1 million federal workers were temporarily thrown out of work on Tuesday as the U.S. government partially shut down for the first time in 17 years in a standoff between President Barack Obama and congressional Republicans over healthcare reforms.
Traders are also paying closing attention to the U.S. debt ceiling deadline in mid-October. During the 2011 debt-ceiling crisis, an agreement was reached only at the last minute to avert a U.S. default, helping gold to hit a record high of $1,920 an ounce in September 2011.
"The market had priced in a screaming rally off of it (Congress deadlock). When it didn't materialize, that triggered stop-loss orders in gold futures," said Frank McGhee, head precious metals dealer at commodities brokerage Alliance Financial LLC.
In the physical retail sector, a survey by online precious metals market BullionVault showed that its private-investor sentiment slipped in September but the Federal Reserve's decision to keep its massive bond-buying program limited further decline.
Among other precious metals, silver fell 2.3 percent to $21.14. Platinum was down 1.4 percent to $1,379.40 an ounce, while palladium fell 0.7 percent to $716.47 an ounce.
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