Gold futures dip after last week's rally

Dollar, oil, Russia eyed as traders weigh physical, investment gold demand

By Myra P. Saefong & Moming Zhou, MarketWatch

SAN FRANCISCO (MarketWatch) -- Gold futures closed lower Monday, with traders taking profit from last week's 5% rally and finding little indication for direction from the U.S. dollar and oil.

Gold futures for December delivery fell $7.80, or 0.9%, to close at $825.70 an ounce on the New York Mercantile Exchange. Futures fell earlier to an intraday low of $820.50. Gold ended last week's trading up 5.2%.

"Gold remains hesitant and is not getting clear direction from the dollar which is essentially flat," said Mark O'Byrne, executive director at Gold and Silver Investments Ltd.

"Higher oil prices and weakness in equity markets should result in gold remaining well bid as this market session progresses, but given the degree of macroeconomic and geopolitical uncertainty anything can happen in these markets in the short term," he said in emailed comments.

Gold's slip was limited by a mixed U.S. dollar, with the greenback trading almost flat against the British pound. The pound bought $1.8522 recently. The dollar gained modestly against the euro, with the European currency buying $1.4755.

Resales of U.S. single-family homes and condominiums rose in July but inventories also increased, reaching record levels, data showed Monday. See full story.

The dollar index, which tracks the value of the greenback against a basket of other major currencies, was at 76.80, almost unchanged from Friday. See Currencies.

Dollar-denominated gold prices tend to move in the opposite direction of the greenback.

Physical demand

Julian Phillips, an analyst at GoldForecaster.com, said he believes the dollar is "having less and less effect at the moment as we run out of time before the high season in gold begins in the last quarter."

Recent physical demand for gold remains very robust in the U.S., India, the Middle East and Asia, O'Byrne said. The U.S. Mint recently announced the suspension of sales of some of its gold coins. See related story.

While some analysts said the issue is about a shortage of blanks to create the coins, not a shortage of the raw material, O'Byrne said an unprecedented level of demand and a lack of supply also played an important role.

"The bottom line is that this lack of supply and huge demand will result in materially higher prices in the coming weeks," he said.

O'Byrne also pointed out that the Commitment of Traders monthly report shows an "unprecedented and phenomenal level of shorting in recent weeks -- and this shorting was heavily concentrated amongst just a handful of players."

For now, "the market place is presently divided into two parts, the jewelers who have a little time to buy before they need to together with investment demand which waits for the price to be ready to rise, before they go in," said Phillips in emailed comments.

"The other side is the short term traders on Comex, who take opportunities on both the up and down side of the market," he said. "Last week saw them sell until they hit support below $800, then vigorous demand take the gold price back up over $800."

"Right now they are deciding whether to knock the price down again or have they hit too large a support," he said. "This week will decide that."

Phillips doesn't believe that tension between Russia and the U.S. is affecting gold prices.

"As to international news affecting the gold price, I personally only see news relevant to the monetary system and directly to gold buying or selling as being of importance," he said. "Georgia and such troubles, like Iraq, don't make people buy gold."

"It is becoming clearer that the problems of the monetary system where they affect the future value of the dollar are worsening, but are also affecting other currencies," Phillips said.

In other commodities trading, crude-oil futures finished higher as a new tropical storm formed in the Atlantic.

Nymex crude for October delivery closed 52 cents higher at $115.11 a barrel on the Nymex.

On the stock market, U.S. shares dropped on worries about the financial sector.

Other metals

Also on the Nymex, September silver fell 0.8% to c;pse at $13.37 an ounce, and October platinum shed 0.4% to end at $1,435 an ounce. September palladium fell to $286 an ounce, down $3. September copper added 0.3% to end at $3.4815 a pound.

Tracking the commodities sector as a whole Friday, the Reuters/Jefferies CRB Index, a measure of major commodity futures, rose 0.1% to 395.13.

On the equities side, the Amex Gold Bugs Index lost 0.5% to close at 341.02 points.

The SPDR Gold Trust fell 0.1% to close at $80.93 and the Market
Vectors-Gold Miners ETF declined by 1.2% to end at $37.05, but the iShares Silver Trust ETF added 0.5% to close at $13.33.

Myra P. Saefong is MarketWatch's assistant markets editor, based in San Francisco.
Moming Zhou is a MarketWatch reporter, based in San Francisco.
source:marketwatch.com