US GOLD OPEN - Tensions remain high after surprise Tuesday sell-off

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Tom Jennemanntom.jennemann@fastmarkets.comSenior North American Correspondent973-204-3383

New York 19/12/2012 - Gold futures stabilised somewhat in the US on Wednesday on physical dip-buying and short covering but many traders are still licking their wounds following yesterday's hard-to-explain washout.

Gold for February delivery on the Comex division of the New York Mercantile Exchange was last down $1.70 at $1,672.40 per ounce. While the market has steadied, Tuesday proved hectic - gold lost about $25 in just a matter of minutes.

“Investors turned aggressively against precious metals yesterday, as a generally quiet day turned into a dramatic sell-off after the London PM fix. Gold, which has been struggling to unhinge itself from the $1,700 level, dropped to a low of around $1,660,” Standard Bank noted.

“Physical buying was evident; although, even coupled with a weaker dollar this was not enough to turn the tide. Clearly, participants are feeling vulnerable. Dallas Fed President Fisher once again downplaying the benefits of QE yesterday did not help,” the bank analysts added.

Dennis Gartman, an economist and editor of the Gartman Letters, blamed the fall in gold on the cancellation of soybean contracts by the Chinese, which was sufficient to to suggest that China's economy are not quite as good as had been expected.

“Although that cancellation might just be nothing more than the Chinese government playing games with the grain market, knowing full well that its cancellation would send prices lower allowing them to buy soybeans cheaper later. Nevertheless, the cancellation weighed heavily upon commodities generally and upon the gold market,” Gartman said.

“We also blame the strength in the equity markets for gold's weakness, clearly capital is rushing from gold and into equities. Rising equities were and are gold's problem; better economic circumstances in Asia and perhaps even in Europe were and are gold's problem,” said Gartman, who noted that he unfortunately stopped out of his long position of gold in Japanese yen terms.

This morning the bleeding in gold has slowed -support has come from Indian bargain hunting and a favourable currency environment. The euro has continued to rally, surging by three-quarters of a cent to a 17-month high of 1.3300 against the dollar.

“Noted weakness in the Greenback might have added to the short covering tilt overnight, but recently currency related action hasn't been given a front and centre standing in the gold trade,” the CME Group said in a market commentary.

Meanwhile, Germany's DAX and France's CAC-40 were up 0.26 percent and 0.53 percent respectively, while light sweet crude (WTI) oil futures for January delivery on Nymex were 58 cents stronger at $88.50 per barrel.

In European data, the Munich-based Ifo Institute said its index tracking the business climate in Germany rose for the second consecutive month, posting a reading of 102.4 compared to 101.4 for November. The forecast had been for 102.0.

In the US, lawmakers have until the end of the year to reach a compromise on budgetary issues - inaction would trigger huge spending cuts and new taxes that could slow growth and tip the US economy back into recession. It appears that a deal is starting to take shape; however, given the partisan rancour in Washington its always possible that process could break down at any minute.

“While the fiscal cliff rumour mill is expected to continue to influence the markets, gold appears to have extracted almost all of any anticipation of a deal. In fact, some traders now think that gold isn't taking its guidance from that situation,” CME said.

As for the other precious metals, Comex silver for March delivery was last down 16.9 cents at $31.50 per ounce. Trade has ranged from $31.420 to $31.870.

Platinum futures for January delivery on the Nymex were up $7.20 at $1,600.90 an ounce and the March palladium contract was at $699.15 an ounce, up $8.20.
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