US gold futures finished lower after trading in a $20 range on Wednesday, hit by a strengthened dollar and as they tracked choppy movements in the equity markets. Market watchers said volatility in the gold futures market could remain in the near term due to a drop in physical demand and uncertainties from financial markets outside of the commodity sector.
"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.
The active gold contract for February delivery at the COMEX division of the New York Mercantile Exchange settled down $7.20 at $883.10 an ounce after peaking at $896.50.
Gold futures have cut losses from the early sessions as US stocks stemmed further decline. The February contract bottomed at $876.60. Nickas' view echoed other analysts' comments that decreased jewellery demand could weigh heavily on the price of gold.
Last week, India's Bombay Bullion Association said the country's imports of gold in 2007 could have fallen by 20 percent due to a surge in prices. In 2006, India imported about 715 tonnes of gold. Nickas said bullion investors could wait it out on the sidelines because of their preference to hold cash in a volatile market.
"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.
On Tuesday, February futures hit a three-week low of $849.50 as investors liquidated positions in the precious metals market and opted for liquidity following a global stock rout. "The trend is still up in gold. But the corrections will be far greater than the investing public is willing to participate in," said Nickas, adding that corrections of $40 to $50 could be possible.
James Steel, metals analyst of HSBC in New York, told clients in a note that he believed the near-term direction of gold prices would be largely determined by the market view on Tuesday's Fed rate cut and the likelihood of another cut at the Fed's scheduled meeting on January 29-30.
"Should equity market sentiment - which has generally been positive until recently - remain negative and track the more depressed interest rates and credit markets, which show signs of increasing default risk from the bond insurers and others, then gold is likely to rally further, we believe," Steel said.
Gold weakened as 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.
On the legal front, a bill passed by the US House of Representatives last year that would impose stiff new royalties on hardrock mining companies will likely be toned down by the Senate, where pro-mining lawmakers hold more sway.
If it becomes law, it would be the first major overhaul of the General Mining Law since President Ulysses S. Grant signed it 136 years ago to encourage Western land development.
Freeport-McMoRan Copper & Gold Inc said on Wednesday quarterly profit fell slightly as rising costs erased gains from sharply higher copper output and prices. It also trimmed its copper and gold forecast. Total open interest of COMEX gold futures totalled 560,173 lots on Tuesday, down 1,474 lots from last Friday.
COMEX estimated 1:00 pm EST (1800 GMT) gold futures volume at 170,842 contracts, and gold options at 14,404 lots. Total turnover in Chicago Board of Trade electronic 100-oz gold futures was 32,144 lots at 2:32 pm EST (1932 GMT) http://www.cbot.com/cbot/pub/page.
At 2:15 pm, spot gold was quoted at $884.75/885.45 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 closed down 13.5 cents at $15.970 an ounce, trading in a range from $15.765 to $16.250.
Spot silver was at $15.97/16.02 against $16.00/16.05 late Tuesday. London silver was fixed at $15.95. April platinum finished up 50 cents at $1,559.10 an ounce. Spot platinum was quoted at $1,551.50/$1,556.50. March palladium dropped $1.65 to end at $369.45 an ounce and spot palladium fetched $362.50/$367.50.
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