Gold uptick stutters as investors review asset positions

A move towards cash and bonds and the sharp fall in oil price have contributed to gold's recent small recovery weakening as investors remain nervous on commodities.

TOKYO (Reuters) - 

Gold dropped 1.5 percent on Tuesday as investors viewed bullion as a risky asset, preferring to lock in their positions to raise cash amid deepening financial turmoil after the implosion of Lehman Brothers.

Though gold normally gains on safe-haven buying during financial crises because its value is not tied to fiat money, portfolio managers were keen to shed positions in commodities after Lehman's bankruptcy, the takeover of Merrill Lynch, and fears major insurer American International Group needed to raise additional capital.

As of 0450 GMT, spot gold fell 1.5 percent, or $11.90, to $774.30 an ounce from Monday's nominal close in New York.

"Safe-haven demand lifted gold back to nearly $800. But profit-taking emerged after seeing the market run out of steam as the market focused more closely on the financial problem," said Tatsuo Kageyama, analyst at Kanetsu Asset Management in Tokyo.

"Investors want to hold cash or bonds. Gold was bought initially, but basically many investors treat gold and other commodities as risky assets."

Precious metals were undermined on selling led by Japanese investors returning from a three-day weekend, with a sharp drop in oil prices also weighing on prices.

Market participants will closely watch the outcome of the Federal Reserve's policy-setting meeting later in the day. There is talk the central bank could ease interest rates at the meeting, though analysts say they are not expecting the Fed to loosen its monetary policy.

COMEX gold futures fell on Tuesday after jumping nearly 3 percent in New York on Monday. The most active December contract was trading down $8.0 or 1 percent at $779.0 from the New York settlement.

The benchmark August 2009 gold contract on the Tokyo Commodity Exchange was down 9 yen or 0.3 percent at 2,609 yen per gram from Friday's close.

"Investors are cutting their risk positions as uncertainties are increasing with share prices falling and also crude prices quickly plunging to near $90," said Shuji Sugata, a manager at Mitsubishi Corp Futures and Securities in Tokyo.

"Some bargain-hunting could emerge as gold is still slightly more supported than other commodities, but you simply cannot build new buy positions aggressively from here," Sugata said.

Crude oil prices slumped nearly $3 to a seven-month low as the collapse of Lehman ignited fears that the credit crisis may weaken the global economy and further depress energy demand.

Platinum plunged as the failure of Lehman deepened concerns over the global economy and demand for the white metal.

Spot platinum dropped more than 4 percent to as far as $1,110 an ounce -- the lowest since January 2007.

Tokyo platinum futures fell more than 7 percent to as far as 3,705 yen a gram, the lowest for a benchmark since January 2006.

Platinum, mainly used in autocatalysts, has been hit by heavy selling due to a slowing U.S. economy and poor car sales in the United States, Japan and China. It struck a record high of $2,290 an ounce in March.

Palladium tumbled more than 5 percent, falling in line with platinum.

© Reuters 2008. All Rights Reserved.

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