GOLD SINKS BELOW $1,700 / THE WALL STREET JOURNAL

COMMODITIES

December 13, 2012, 10:27 a.m. ET

Gold Sinks Below $1,700

By TATYANA SHUMSKY

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NEW YORK— Gold futures were sharply lower, as some investors locked in gains made on the Federal Reserve's decision to pump more money into the financial system while others refocused on the threat of slow deficit talks.

The most actively traded contract, for February delivery, was down $24.20, or 1.4%, at $1,693.70 a troy ounce midmorning Thursday on the Comex division of the New York Mercantile Exchange.




Gold prices had rallied to a high of $1,725 a troy ounce Wednesday after the Fed announced a new bond-buying program that would "initially" purchase $45 billion a month in Treasury debt, expanding the bank's balance sheet.




The new effort is widely seen as inflationary, burnishing the allure of store of value assets like gold.




But gold's gains were erased amid heavy selling earlier in the global day. With just 11 trading days left in 2012, and trading volumes in gold futures already on the decline, caution ahead of the year end has gripped markets.



"It has been a savage marketplace for the metals since we closed New York trading," traders at TD Securities said in a note to clients.



Gold traders tend to avoid running large positions during the final weeks of the year, when low trading volumes and a paucity of other participants can make prices more volatile.



Investors are also wary of holding large open positions in the face of mounting uncertainty over the U.S. budget deficit talks. Lawmakers must reach a deal on how to reduce deficit in order to avoid a sweeping package of tax increases and spending cuts that automatically kicks in next year and threatens to plunge the U.S. into recession.



Meanwhile, Standard Bank said that demand for physical gold, as tracked by the Standard Bank Gold Physical Flow Index, has been on the rise and is looking stronger than during the same period last year.



"Participants, especially in India and the Far East, are drawn in by the lower prices," Marc Ground, a commodities strategist with the bank, said in a note.



"For Indian buyers in particular, this lower gold price has relieved some of the pressure of a weaker rupee and a higher interest rate environment-prompting them to return to the market, after being noticeably reticent this past year," he added.



India is the world's largest gold buyer, and precious metals traders tend to closely follow shifts in its purchasing trends as they can have an impact on global gold prices.



Mr. Ground added that China, the world's second-largest gold buyer, has also been a significant and stable presence in the physical gold market in recent months. Mr. Ground said that buyers from China should be lured into the gold market by dips below $1,700 a troy ounce.