Precious Metals Drop, With $1.5 Billion Wiped From Funds

Gold, silver and platinum tumbled as the dollar’s advance to a five-year high cut demand, wiping almost $1.7 billion from the value of precious metals-backed funds.

Gold and silver slid to four-year lows as the Bloomberg Dollar Spot Index climbed after Republicans gained control of the Senate from the Democrats in U.S. midterm elections and Bank of Japan Governor Haruhiko Kuroda said he saw no limit to the steps the BOJ may take to defeat deflation. About $1.66 billion was erased from the value of precious metals exchange-traded product holdings today.

The Federal Reserve is moving closer to raising interest rates just as other central banks seek to spur their economies. Rising rates cuts gold’s allure because bullion generally offers investors returns only through price gains, while a stronger dollar typically curbs demand for a store of value. Gold futures are set for the first back-to-back annual drops since 1998 and the slump is causing losses for some higher-cost mining firms.

“People expect policies from the Republicans that lend confidence to the outlook for the economy,” Scott Gardner, who helps manage $450 million at Verdmont Capital SA in Panama City, said in a telephone interview. “Conservatives by nature are more hawkish and that is pushing the dollar higher. People do not see the need for gold.”

Gold futures for December delivery slipped 1.9 percent to settle at $1,145.70 an ounce at 1:55 p.m. on the Comex in New York, after reaching $1,137.10, the lowest since April 2010.

Trading Volume

Trading was more than double the average for the past 100 days for this time of day, data compiled by Bloomberg show.

Silver’s 30-week correlation coefficient to gold is near 0.87, with a reading of 1 signaling the two moved lockstep in the same direction. The link between gold and platinum is at 0.63, while gold and palladium’s correlation is at 0.28.

Holdings in gold-backed exchange-traded products fell 3.7 metric tons to 1,643.4 tons yesterday, the lowest since August 2009, data compiled by Bloomberg show. Assets in the SPDR Gold Trust, the biggest ETP, are at the lowest since September 2008, when Lehman Brothers Holdings Inc. collapsed. The value of precious-metals holdings has dropped to about $76 billion from $97.4 billion in March.

Falling oil prices and the end of the Fed’s bond buying as the economy strengthens have diminished demand for the metal as an inflation hedge. The Labor Department is forecast to report on Nov. 7 that nonfarm payrolls rose 235,000 last month and the unemployment rate held at 5.9 percent.

‘Under Pressure’

“As long as the U.S. economy stays on track and the dollar remains strong, the metals will continue to stay under pressure,” David Govett, head of precious metals at Marex Spectron Group in London, said in a note. “The only positive in a sea of precious negativity is the fact that the markets are getting themselves shorter and shorter the lower we go. At some point there will be a short-covering move,” he said, referring to closing out bets on lower prices.

Gold’s drop last week took it below production costs for five of 19 mining companies tracked by Bloomberg Intelligence, meaning they’re losing money on every ounce mined. Three more producers were within $50. As gold climbed to a record $1,923.70 in 2011, mining costs were allowed to spiral and mines were built assuming high prices, said Mike Schroder, a fund manager at Old Mutual Investment Group in Cape Town.

Silver futures for delivery in December sank 3.2 percent to $15.439 an ounce on the Comex, and reached $15.12, the lowest since February 2010. Silver ETP holdings dropped 101.3 tons yesterday, the most since Oct. 8, data compiled by Bloomberg show.

On the New York Mercantile Exchange, platinum futures for January delivery fell 1.2 percent to $1,210.60 an ounce, the lowest settlement since July 30, 2009.

Palladium futures for delivery in December retreated 4.1 percent to $757.85 an ounce, the biggest drop since June.

Platinum has dropped 12 percent this year, while palladium gained 5.5 percent.

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