US gold futures dropped slightly in volatile trade on Wednesday, hit by a strengthened dollar and as they tracked movements in the equity markets. Market watchers said volatility in the gold futures market could be rising in the near term due to a drop in physical demand and uncertainties from financial markets outside of the commodity sector.
"But the underlying factor is if jewellery demand diminishes, we will still see a reluctance to go above $900 an ounce, the psychological barrier," said George Nickas, precious metals broker with FC Stone in New York. Last week, India's Bombay Bullion Association said the country's imports of gold in the calendar year could have fallen by 20 percent due to a surge in prices. In 2006, India imported about 715 tonnes of gold.
At 10:48 am EST (1548 GMT), the active gold contract for February delivery at the Comex division of the New York Mercantile Exchange was down $1.70 at $888.60 an ounce after peaking at $896.50.
Gold futures have cut losses from the early sessions as US stocks partly recovered. The February contract bottomed at $876.60. Nickas said bullion investors could wait it out on the sidelines because of their preference to hold cash amid uncertainties about volatile financial markets.
"Cash is king. People are reluctant to do (buy gold) because they want to make their money work and get a rate of return. But now it's not the time to think that way," Nickas said.
Gold recouped its initial losses even though the dollar rose against the euro after euro zone services sector growth fell below forecasts to a rate not seen in over four years, adding to the case for an interest rate cut from the European Central Bank.
Spot gold was quoted at $888.80/889.60 versus Tuesday's New York close of $890.30/891.00. London bullion dealers fixed the afternoon spot reference price at $888.25. Comex March silver was up 3.0 cents at $16.135 an ounce, trading in a range from $16.245 to $15.765.
Spot silver was at $16.05/16.10 against $16.00/16.05 late Tuesday. London silver was fixed at $15.95. April platinum was up 40 cents at $1,559.00 an ounce. Spot platinum was quoted at $1,554.50/$1,559.50. March palladium dropped $3.15 to $367.95 an ounce and spot palladium fetched $363.50/$368.50.
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