Battered Gold Fails to Lift

Updated from 11:29 a.m. EDT

Gold's failure to convincingly break through psychologically important resistance at $600 an ounce Thursday sparked another bout of short-selling as investors shrugged off worse-than-expected economic news and a botched terrorist raid in the Middle East.

Even Commerce Department data showing that the U.S. chalked up a record $68 billion July trade deficit, worse than the forecast $65 billion, could only spark a limp early-session lift for bullion and a mixed response from the currency markets.

After reaching a short-lived intraday high of $607, benchmark contracts for December delivery of bullion closed down $2.90 at $594.40 an ounce on the Comex division of the New York Mercantile Exchange. The dollar was buying 117.94 yen, up from 117.59 yen Monday, but it was losing against Sterling, with one British pound buying $1.8735 compared with $1.8643 a day earlier. The euro was recently at $1.2692 vs. $1.2702 late Monday.

Gold tends to move inversely with the U.S. dollar.

"There was a lot of short-selling Monday that returned to the market just moments before the session closed Tuesday," says Carlos Sanchez, an analyst at New York-based specialty consulting firm CPM Group, "It's bearish that prices didn't close above $600 an ounce, but bullish that they didn't fall all the way to $580," the likely zone for the next major support level.

He still expects to see a rally that could follow the pattern exhibited by the metal in June, when spot prices sprang back from a low of $567.25 an ounce on June 14 to hit a high of $671.50 on July 17. Sanchez warns that investors should anticipate increased metal price volatility during the days to come.

A telling sign that the tone has turned bearish was when a botched terrorist raid on the U.S. embassy in Syria failed to boost gold. The absence of "safe-haven" buying only added to the negative technical outlook.

Other news shows the European Central Bank system stepped up its pace of bullion selling as holdings of gold and receivables dropped by 114 million euros, or about 7.5 tons, last week, compared with 28 million euros in the prior period. That means the bank still has about 150 tons of potential selling available in its quota, under the terms of a multilateral sales agreement that expires Sept. 26. The ECB is not, however, obliged to reach the full allowance.

Some observers blame Monday's selloff on the ECB trying to offload even more metal as the central bankers rebalance their reserves. In the absence of major news, investors, who hold more gold than all central banks combined, will no doubt remain skittish to such suggestions.