Gold, Oil Lead Market Plunge; Dow Falls 26
Inflation fears faded Tuesday as gold and oil prices plunged, reflecting the weak economy.
Stocks suffered their sharpest losses since late July as investors returned from the holiday weekend in a selling mood. The NASDAQ market was hit hard.
Bond yields again dropped to historic lows, but began to move up late in the day after Federal Reserve Board Chairman Alan Greenspan warned of higher short-term interest rates ahead.
Commodities
Traders were stunned by the magnitude of the selling in gold markets.
By the close in New York, near-term gold futures on the Comex were off $14.40 to $350.10 an ounce, the lowest price since April.
Analysts said the selling was launched early in the day by commodity funds and other short-term traders, responding in part to the lackluster August employment report released Friday.
With no sign of inflation resurging in the weak economy, many speculators who drove the gold market over $400 in midsummer decided to bail, analysts said. And when gold broke decisively through the $362-$364 level--a key technical level on traders’ charts--the selling mushroomed.
In addition, gold was hurt by outside factors, experts said.
A plunge in oil prices added to the disinflation trend. The near-term crude futures contract lost 66 cents to $17.07 a barrel on the New York Merc, the lowest in more than three years.
The slide was egged on by the International Energy Agency, which cut its world oil consumption estimate for the six months starting Oct. 1 by 300,000 barrels a day--while supplies continued to build as OPEC overproduces.
The euphoria over the Israeli-Palestinian peace proposal suggested that tension in the Mideast could dissipate significantly.
“The prospects of an unprecedented mutual recognition pact means there is less of a reason to hold gold as a safe haven in the region,” said Bernard Savaiko, analyst with Paine Webber Inc.
News from China also riled some traders. The Chinese government said it would double the low official price it pays for gold in an effort to spur production from Chinese mines. Because the government is the only legal buyer of gold in China, the move was also seen as an attempt to stop the rampant illegal import of gold--which has been profitable for smugglers because of high demand for gold jewelry from average Chinese.
In the United States, meanwhile, traders said Tuesday that gold’s bull rally has been badly wounded and that a return to the $330 to $340 level is possible soon.
Others metals followed gold lower. Silver futures collapsed 26 cents to $4.26 an ounce.
Stocks
The market seemed unnerved by the action in gold and oil prices.
But traders said stocks were vulnerable to profit taking anyway after August’s strong rally.
The Dow industrials fell 26.83 points to 3,607.10, the biggest loss since a drop of 27.95 points July 30.
Losers topped winners 12 to 7 on the Big Board, although volume was restrained.
The damage was much worse in the NASDAQ market of mostly smaller stocks, which had far outpaced blue-chip stocks in the August rally. The NASDAQ composite index plunged 10.36 points, or 1.4%, to 739.35.
“It was a retreat that was long in coming, and I think it was a healthy retreat,” said Lance Zipper, trader at Kidder Peabody.
But analysts also noted that the bond market rally--which has helped power stocks higher this year--lost steam late in the day, after Fed Chairman Greenspan warned of the potential for higher short-term interest rates.
Among the market highlights:
Gold mining stocks dove with gold. Homestake Mining plunged 2 1/8 to 16 1/4, Echo Bay fell 1 3/8 to 9 3/8, Newmont Gold sank 3 to 39 7/8, ASA tumbled 2 7/8 to 39 3/4 and American Barrick lost 2 to 22.
Energy stocks gave ground late in the day. Enron Oil & Gas fell 1 3/8 to 49, Unocal lost 1/2 to 28, Chevron dropped 1 3/4 to 92 and USX-Marathon slumped 1 to 19 1/4.
Computer networking stocks were hit. Traders’ attention focused on a new network technology--asynchronous transfer mode--that was highlighted at a San Francisco trade show last week. The new technology could eventually crimp some networkers’ business, analysts said.
Among networkers and related stocks, Cisco Systems fell 4 to 43 3/8, Newbridge Networks lost 3 5/8 to 66 5/8, Sybase slumped 4 1/2 to 56 3/4 and Oracle dropped 2 3/8 to 51.
Overseas, profit taking was also the rule. In Frankfurt, the DAX index fell 24.32 points to 1,885.96, while London’s FTSE-100 index fell 20.4 points to 3,038.60.
In Tokyo, the Nikkei average lost 98.71 points to 20,962.10.
In Toronto, the TSE-300 index suffered its biggest one-day slide in nearly four years, hurt by the selloff in gold mining shares. The index plummeted 101.88 points, or 2.5%, to 4,023.71.
Other Markets
The bond market rally continued but began to wane late in the day, after Greenspan’s warning that short-term interest rates will rise eventually.
By the close, the 30-year Treasury bond yield was at 5.90%, down from 5.94% on Friday. It had neared 5.85% earlier in trading.
Short-term rates, meanwhile, inched up. The yield on six-month T-bills closed at 3.15%, up from 3.12% on Friday.
“When and by how much real short-term interest rates will eventually need to rise will depend on economic developments and inflation pressures,” Greenspan told the U.S. Senate in written answers to questions posed by senators.
In currency trading, the dollar weakened again. It closed in New York at 1.613 German marks and 104.25 Japanese yen, down from 1.622 marks and 104.60 yen Friday.
