Gold, silver slump on fiscal cliff concern

Gold and silver fell the most in three weeks as pessimism on a US budget resolution eroded demand for commodities.

On the Comex in New York, gold futures for February delivery tumbled 1.5 per cent to $US1,718.50 an ounce at 12:29 p.m. A close at that price would mark the biggest drop for a most- active contract since Nov. 2. In the first 30 seconds of floor trading, 7,700 contracts traded, according to PVM Futures Inc.

The Standard & Poor's GSCI Spot Index of 24 raw materials fell as much as 1.4 per cent, erasing this year's gain. Erskine Bowles, the co-chairman of President Barack Obama's 2010 fiscal commission, said that a deal with Congress to avert the so- called fiscal cliff is unlikely by the end of this year.

"There's 'risk-off' trading, and behind that is talk of the fiscal cliff becoming more of a reality than people had thought," Harry Denny, a broker at Hoboken, New Jersey-based PVM, said in a telephone interview. "The fiscal-cliff resolution has everyone a little cautious."

An estimated 391,633 futures contracts were traded today, compared with a daily average of 176,000 this year through yesterday.

The most-traded gold options yesterday were bets on further price drops. Exchange data show 9,573 put options traded, giving owners the right to sell at $US1,700 on the Comex by January. That compares with 461 contracts a day earlier. Each contract is for 100 ounces. The next-most-traded contracts were January puts giving owners the right to sell at $US1,690 and at $US1,695.


Put Options

The increase in put-options trading contributed to today's slump, Dave Lutz, the head of exchange-traded fund trading and strategy at Stifel Nicolaus & Co. in Baltimore, said in a telephone interview.

The jump in put options "is definitely part of it," he said.

The decline in futures was also fueled by algorithmic- trading programs, said Carlos Perez-Santalla, a broker at PVM.

Holdings in gold-backed exchange-traded products climbed 5.1 metric tons to a record 2,612.1 tons yesterday, data compiled by Bloomberg show. This month, the US Mint has sold 75,500 ounces of American Eagle gold coins, the most since January, data on its website show.

Through yesterday, gold advanced 11 per cent this year, heading for the 12th straight annual gain. The price reached a record $US1,923.70 on Sept. 6, 2011, as global interest rates remained low, enhancing the appeal of the metal as an alternative investment. Debt woes in the US and Europe also triggered demand for a haven from slumping currencies.

The drop in futures "is counter-intuitive with everything else that is going on in the economy," Ross Norman, the chief executive officer of Sharps Pixley Ltd., a brokerage in London, said in a note.

Silver futures for March delivery fell 1.3 per cent to $US33.64 an ounce on the Comex. A close at that price would mark the biggest decline since Nov. 2.