Gold Falls on Concern Chinese Demand for Commodities May Ease

By Pham-Duy Nguyen

Feb. 27 (Bloomberg) -- Gold in New York fell after equities in China plunged the most in a decade, sparking speculation demand for the precious metal and other commodities may slow.

Investment demand for bullion jumped 29 percent last year in China, the second-biggest buyer of gold after India, according to the producer-funded World Gold Council. China's appetite for commodities helped drive the prices of copper and crude oil to records last year.

``A major down wave in Chinese markets would immediately and significantly affect the equally red-hot commodities sector,'' Jon Nadler, an investment-products analyst at Montreal-based Kitco Minerals & Metals Co., said in an e-mail. ``Gold would not likely be immune from a large-scale decline.''

Gold futures for April delivery dropped $1.80, or 0.3 percent, to $688 an ounce at 12:36 p.m. on the Comex division of the New York Mercantile Exchange. Prices earlier dropped as much as $12.60, or 1.8 percent. The metal closed at a nine-month high yesterday.

China's stock-market plunge wiped out more than $100 billion from a market that has doubled in the past year.

A decline in demand for commodities from China, the biggest user of copper and second-largest user of oil, may reduce gold's appeal as an inflation hedge, analysts said. China's economic growth has helped fuel a 65 percent gain in the Reuters/Jefferies CRB Index of 19 commodities in the past five years.

$600 an Ounce?

``We could see a reduction in demand for inflationary hedge products such as gold in the weeks and months ahead,'' said John Person, president of NationalFutures.com, a brokerage in Palm Beach, Florida. ``We could be looking at $600 to $620 gold prices this spring.''

Some investors buy gold to hedge against accelerating prices. Gold futures soared to a record $873 an ounce in January 1980 after inflation surged past 13 percent.

Gold's losses may be limited should investors seek a haven from turmoil in the markets, analysts said.

``If anything, the sell-off in Chinese stocks will increase demand for gold,'' said James Turk, founder of GoldMoney.com, which had $186 million worth of gold and silver in storage for investors at the end of January. ``As investors in China get burned with stocks, they will shy away from speculative stuff like their stock market, and opt for the safety and security that gold offers.''

Investors may also buy gold as tensions escalate in the Middle East. Iran, the region's second-biggest oil producer after Saudi Arabia, on Feb. 21 defied a United Nations Security Council deadline to stop enriching uranium. UN members were working on a second resolution.

Iranian Tensions

``Gold gets extremely well-supported on the breaks,'' said Frank McGhee, head metals trader at Integrated Brokerage Services LLC in Chicago. ``There's a strong underpinning of demand with concerns over Iran and concerns over a regional sectarian conflict in the Middle East.''

Gold's decline after seven weekly gains is an opportunity to buy, some analysts said. UBS AG, Europe's biggest bank by assets, yesterday said it expects gold to reach $750 in the next three months.

``There's stable trade above $675 and that should build and promote rallies to attack $700,'' said Ralph Preston, a senior analyst at Heritage West Financial Inc. in San Diego. ``Today's dip in gold presents a buying opportunity.''

Silver also fell from a nine-month high. Futures for March delivery dropped 10.2 cents, or 0.7 percent, to $14.73 an ounce on Comex. Before today, prices have climbed 15 percent this year.

A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net .