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Gold trapped in range, global economy worries bite

Spot gold hit a high of $663.90 an ounce before dipping to $663.60/664.40, hardly changed from $663.50/664.30 in New York on Tuesday, when it fell nearly $3 on declines in stock markets, weaker oil and fears of a global credit crisis.

Gold hovered below the 100-day moving average around $665 and has lost around 9 percent in value since rallying to a 26-year high of $730 an ounce in May 2006.

“It looks like we are not out of the woods yet despite a lot of people’s desire to see it settle down, including of course, the central banks,” said Darren Heathcote of Investec Australia in Sydney.

“I suspect gold will remain under pressure for the time being whilst there’s a possibility there will be liquidation to cover more margin calls,” he said.

Gold is traditionally seen as a safe haven in times of trouble but it has been behaving much like other assets recently, tumbling to a seven-week low at $641.10 on Aug. 16, when fears of a global liquidity crisis sparked a sell-off in financial markets.

Gold has rebounded more than 3 percent since the last drop on bargain-hunting and purchases from jewellery makers, but dealers expected volatility to stay amid turmoil in U.S. credit markets that stems from subprime mortgages.

MSCI’s measure of Asia Pacific stocks excluding Japan fell more than 2 percent, while Tokyo’s Nikkei average also slid more than 1 percent after economic and credit worries hit Wall Street overnight.

A report showing U.S. consumer sentiment took its steepest fall in nearly two years and Merrill Lynch’s move to downgrade its ratings on some major U.S. banks due in part to the ailing credit markets scared off investors.

“People are basically frightened and they are still throwing away assets like gold. But looking ahead, I think fundamentals are still intact because of the ETF holdings and a weaker dollar,” said a dealer in Singapore.

“Definitely, gold needs to test $670 to sustain the upside. I think $655 can be a good support for the week. Just wait for the big boys to reorganise and we would see gold testing $670,” said the dealer, referring to fund managers.

Despite gold’s erratic behaviour, long-term investors held onto their positions in bullion exchange-traded funds (ETFs). Bullion used to back StreetTRACKS Gold Shares, the world’s largest gold ETF by far, climbed to a record 515.44 tonnes as of Monday. NYS-TT

The new benchmark August 2008 gold futures contract on the Tokyo Commodity Exchange started trading on Wednesday and ended at 2,472 yen per gram, higher than 2,452 yen at the opening.

Problems in the U.S. housing sector have spread to global credit markets and sparked a wave of risk aversion that caused a drop in higher-yielding currencies while boosting the yen as investors rushed to unwind carry trades.

But the yen succumbed to profit taking on Wednesday, falling to 114.40 yen after hitting a high of 113.86 yen in early trade as the stock market sell-off spooked risk-wary investors. The dollar edged up against the euro at $1.3590 ”I think once the dust settles eventually on the subprime thing, I suspect gold would probably be one of the greatest beneficiaries as people look to diversify again into other asset classes, particularly ones which are not really subject to credit,” said Heathcote of Investec.

Minutes from the Federal Reserve policy meeting on Aug. 7, released on Tuesday, showed the central bank recognised that worsening financial market conditions might require a policy response.

In other precious metals, platinum was unchanged at $1,253/1,258 an ounce. Palladium rose to $324/329 an ounce from $323/327 late in New York.

Silver edged up to $11.76/11.81 an ounce from $11.72/11.77 an ounce.