Gold falls to 6-month low under $390
Indexes down 6% on concerns Chinese demand will fall
By Myra P. Saefong, CBS.MarketWatch.com
Last Update: 11:37 AM ET April 28, 2004
SAN FRANCISCO (CBS.MW) -- Gold futures took their biggest hit since January falling as much as $15 an ounce to their lowest level in six months as investors feared that new rules in China, promoting reduced bank lending, will slacken demand from the Asian country.
Other metals futures sank, with palladium taking an intraday plunge of as much as 12 percent. Metals indexes traded at their lowest levels since August.
China's State Council issued guidelines for companies in the cement, steel, aluminum and property development sectors to use more of their own capital toward their investments, according to John Person, editor of The Bottom Line newsletter.
The move was made to curb over-investment in those sectors, the official Xinhua news agency reported overnight.
"The move could force these companies to reduce their expansion," Person said.
"Combined with the fact that the interest rate environment could change, means more expensive purchasing costs which will lower demand domestically," he said.
Gold for June delivery fell as low as $384 an ounce on the New York Mercantile Exchange, a level not seen since early November. Prices haven't fallen this much in a single session since late January. At last check, the contract was down $13.30 at $385.80 an ounce -- a far cry from Tuesday's one-week high near $400.
"There has been lots of talk about Chinese banks needing to pull in the reigns due to bubble building, non-performing loans at [more than] 20 percent etc.," said Peter Grandich, editor of The Grandich Letter, an investment publication.
Kevin Kerr, editor of newsletter Kwest Market Edge said problems with certain types of lines of credit has worried investors about China for a long time.
"China is unique though -- after all China is like the factory to the world and its shear might in production gives it credibility," he said.
So the news of the government guidelines in China "could spook investors a little, and may put a little pressure on the industrial metals," he said.
But as China builds credit with the world, this problem should improve, he said. And "as China opens up more into the mainstream of commerce, we should see this fears laid aside for the most part," he said.
Aside from the news on China, strength in dollar put pressure on the metals. The dollar strengthened against the euro as the European vs. U.S. interest rate debate waged on. See Currencies Report.
And economic data released Tuesday signaled an economic recovery, which tends to dampen near-term investment demand for gold. U.S. consumer confidence improved for the first time in four months in April. See Economic Report.
Other metals sharply lower
Elsewhere in Nymex trading, July silver moved down by 37.4 cents, or 6 percent, to stand at $5.88 an ounce after closing Tuesday above $6.25 -- at its highest level since April 20.
July copper fell to $1.171 per pound, down 6.7 cents, or 5.4 percent.
June palladium traded at $255 an ounce, down $22.95, or 8.3 percent, while July platinum dropped $31.50 to $802 an ounce.
Still, Grandich advised: "If you believe the Wall Street argument that an economic rebound is occurring around the world, than base metals remains the better choice over precious metals."
Metals indexes drop to August low
Metals mining shares traded lower for a second session, and indexes for the sector dropped near nine-month lows.
"Mining shares continue to weaken as investor's uncertainty on the trend for metals intensifies," said Grandich.
But he believes that "the long-term resolution to metals and mining shares is to the upside -- after this sharp correction within a secular bull market comes to an end."
The Philadelphia Gold and Silver Index ($XAU: news, chart, profile) traded at 82.3, down 5.9 percent. It fell earlier to a low of 81.64. The CBOE Gold Index ($GOX: news, chart, profile) was down 6 percent at 70.02, after a 69.32 low. The intraday lows for the two indexes are the lowest since early August 2003.
The Amex Gold Bugs Index (HUI: news, chart, profile) also dropped 6.9 percent to trade at 180.01. It's low of 178.06 is the lowest since late August of last year.
Shares of Newmont Mining (NEM: news, chart, profile) fell $2.14, or 5.3 percent, to $38.05 after the company reported lower first-quarter earnings. It earned $86.7 million, or 20 cents a share, in the first quarter, compared with $117.3 million, or 29 cents a share a year ago. Excluding special items, the company earned 30 cents a share, down from 38 cents a year ago. The average estimate of analysts polled by Thomson First Call was for earnings of 34 cents a share.
Phelps Dodge (PD: news, chart, profile) saw its shares fall $3.18, or 4.6 percent, to $65.70. It reported earnings of $185.7 million, or $1.90 per share for the first quarter, up from a loss of $15 million, or 21 cents a share, a year ago. The average estimate of analysts polled by Thomson First Call was for earnings of $1.81 a share. Sales rose to $1.597 billion from $978 million a year ago. Phelps also said it is continuing to pay down debt to reach an internal goal of a 25 percent debt to capitalization ratio.
Myra P. Saefong is a reporter for CBS.MarketWatch.com in San Francisco.