Gold Futures Losing Their Luster as Speculators Flee

In the gold market, it was easy come, and now easy go.

Gold futures in New York on Wednesday suffered their biggest one-day loss in 18 months, as speculators whose purchases sparked a rally to a 15-month high by mid-May turned and fled.

Near-term futures tumbled $8.20, or 3%, to $265.70 an ounce. It was the metal’s seventh straight loss and the biggest one-day decline since Nov. 1, 1999.

Gold had run up from $256 an ounce on April 2 to a peak of $287.80 by May 18, a 12% gain.

But as prices surged, many analysts said the rally was little more than an attempt by speculators to get something going. As they bought futures contracts, other traders who had “shorted” gold--betting on lower prices--rushed to buy, to close out their positions. That further stoked the rally.

A report Friday from the Commodity Futures Trading Commission showed that speculators last week had bought almost four times more gold futures contracts than they had sold.

But those traders began reversing their bets when the rally stalled, analysts said.

“There was no fundamental reason for prices to go up in the first place,” said Donald Eckert, head of precious metals trading at J.P. Morgan Chase & Co. in New York. “Then we got the CFTC report, which was extremely negative. It means there is nobody left to keep buying.”

Some traders had argued that gold was rising on concerns that the Federal Reserve’s aggressive credit-easing campaign will fuel inflation later in 2001. Gold is a classic inflation hedge.

But many analysts discounted inflation fears as a reason for gold’s advance.

Gold had similar speculator-driven rallies in September 1999 and February 2000 that quickly collapsed.

This time, the rally was helped by a decline in sales of borrowed gold by producers, analysts said.

Mining companies borrow gold, then sell it, as a means of locking in prices for future production that will be used to repay the debt. Such sales can weigh on prices by adding metal to the market.

Silver prices followed gold lower Wednesday. Near-term silver futures in New York fell 10.1 cents to $4.42 an ounce.

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Tarnished Investment

Despite intermittent rallies, the price of gold has dwindled since the early 1990s as investors have lost interest in the metal and as world central banks have pared their reserves, boosting market supplies.

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Near-term gold futures in New York, per ounce, quarterly closes and latest

Wednesday: $265.70

Source: Bloomberg News