US gold futures ended slightly lower on Wednesday but up from 5-1/2 month lows set amid credit-market worries which prompted jittery investors to sell commodities and liquidate holdings in bullion exchange-traded funds (ETF).
Analysts said they expected prices to stabilise in the near term because of support from physical buyers and renewed overseas investor demand.
Patrick Fearon, precious metals analyst at A.G. Edwards, said that both gold and silver have dropped below important support levels on charts. He said that bargain hunting on lower prices helped gold on Wednesday. Fearon said that inflation pressure seemed to be dissipating in the US economy, weighing heavily on precious metals.
Gold is generally seen as a hedge against inflation. Most-active gold for August delivery on the Comex division of the New York Mercantile Exchange settled down 50 cents at $644.80 an ounce, after sinking to session low of $641.10, its cheapest level since January 12.
It reached a high of $647.50. James Steel, analyst at HSBC, said that concerns over the credit markets and investors' flight from risk pummelled gold and silver and accounted for a general pullback in commodities. "Now we are also seeing some liquidation in the ETFs," which had generally done well and remained fairly firm until recently, Steel said.
Data showed that holdings in streetcar's Gold Shares, the largest gold ETF, dropped just over 11 tonnes to 463 tonnes on Wednesday. "I think that the market has been more concerned with the credit risk and the higher interest rate, which makes it more expensive to own gold, or less attractive to buy it," Steel said.
Investors have become increasingly anxious over the past weeks by troubles at two Bear Stearns-managed hedge funds with exposure to supreme, or high-risk, US mortgage securities.
Stephen Platt, analyst at Archer Financial Services, said that gold's weakness was related to the US supreme mortgage-sector problem and worries that global liquidity was contracting, and that encouraged long liquidation.
Comex estimated final volume at 3:00 pm was 70,015 lots. Turnover at Chicago Board of Trade's electronic 100-oz gold futures was 18,021 lots at 2:51 pm.
In the short term, however, analysts expected support in gold prices. "I'm looking for a little bit of stabilisation. I think that at least for now some of these fears are a little bit overblown. We probably will see renewed foreign investor demand," Platt said. SBC's Steel said that lower bullion prices could stir demand from physical buyers.
He said the market could wait for a measurable increase in physical demand. "We definitely could see a little bit better performance now from people's bottom fishing.
Broadly, the trend still is downward because of the falling inflation pressures," A.G. Edwards' Fearon said. Spot gold rose to $642.50/644.00 an ounce, compared with $642.00/642.60 an ounce late on Tuesday.
The London afternoon gold fix was set at $642.10. Comex September silver closed down 7.2 cents at $12.329 an ounce, dealing between $12.245 and $12.480. Spot silver was quoted at $12.26/12.29 an ounce, above the late on Tuesday quote of $12.24/12.27. London silver was fixed at $12.26 an ounce.
Nymex October platinum ended up $5.80 at $1,283.80 an ounce. Spot platinum traded at $1,266.10/1,273.10 an ounce. September palladium fell $3.15 to end at $367.85 an ounce. Spot palladium fetched $360.75/364.75.