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Gold Prices Pull Back

Simon Constable

Gold futures were dropping Wednesday amid a mass liquidation following the previous day's stock market meltdown.

Contracts for April delivery of bullion slipped $14.70 to close at $672.50 an ounce on the Comex division of the New York Mercantile Exchange.

However, the exchange-traded funds that hold the metal, iShares Comex Gold Trust (IAU Quote) and streetTracks Gold Shares (GLD Quote), were up 1.1% and 1.5%, respectively.

The difference in direction between the futures and the ETFs reflects market action that occurred after the close of the Comex floor session at 1:30 p.m. EST Tuesday, but before trading ended at 4 p.m. EST on the New York Stock Exchange.

With about an hour left in the prior session, the Dow Jones Industrial Average plunged more than 500 points on anxiety over China's economy. The move sparked follow-on futures sales on the Comex's electronic platform and sent gold as low as $664 before it recovered somewhat. The Dow also erased some of its losses before the close.

"When equity markets collapse, even temporarily, there is a rush to cash, for liquidity purposes," says Jeff Christian, managing director at New York-based specialty consulting firm CPM Group. "Investors need to cover margins, so they tend to try to sell everything."

Peter Spina, a technical strategist at GoldSeek.com, says the stock market drop was a "rude awakening" for "complacent" investors, and he fully expects to see a rebound for gold if the equity meltdown spreads. Gold is often purchased as a safe haven investment.

On the economic data front, the Commerce Department made a downward revision to its estimate of fourth-quarter gross domestic product and a minor upward adjustment to an inflation measure. Other news showed a weaker Midwestern manufacturing sector and more evidence of softness in housing.

Foreign exchange dealers didn't seem to mind the lackluster economic news and bid up the greenback. One dollar was recently buying 118.39 yen, up from 117.98 yen late Tuesday. The euro was fetching $1.3219, down from $1.3236 previously.

"The U.S. may have its problems, but relative to the rest of world it's in much better shape than they are," says Doug Roberts, chief investment strategist at New Jersey-based specialty economics firm, Channel Capital Research. "That leads the dollar to go up."

In the precious metals patch, the Market Vectors Gold Miners(GDX Quote) ETF, which tracks a basket of mining stocks, was ahead by 1.6%.

As for base metals, copper contracts closed 8 cents lower at $2.75 a pound on the Comex, up from the lows. The poor housing news and expected softness in China's economy, both of which have been keeping copper prices at historic highs, will likely dampen sentiment among the bulls.

Shares of Freeport-McMoRan Copper & Gold(FCX Quote) were up 1.9%, rebounding from a big dip Tuesday.