Gold drops to 3-mth low on fund trade, debt deal hopes

NEW YORK/LONDON (Oct 11)  Gold fell 1.5 percent on
Friday to its lowest in three months as unusually large sale
orders in New York futures and signs a deal might be near to
avert a potential U.S. debt default prompted jittery investors
to flee the bullion market.
    The precious metal, generally viewed as a safe-haven
investment, fell $30 an ounce in just minutes in early U.S.
trading, sparking selloffs in crude oil and copper. Friday's
drop was reminiscent of a huge sell order that sent gold prices
3 percent lower on Oct. 1.
    U.S. gold futures trading was momentarily halted at 8:42
a.m. EDT (1242 GMT) by CME Group's Stop Logic mechanism
to prevent excessive price movements. In the three minutes
around the ten-second trading pause, gold prices slid almost
$30, or about 2 percent, with an unusually heavy turnover at
nearly 20,000 contracts - about one-fifth of the market's volume
at the time.   
    Bullion's drop stands in sharp contrast with higher U.S.
equities and a lower dollar as other investors were encouraged
by the first signs of progress by U.S. lawmakers to end the
standoff in Washington.
    On Friday, President Barack Obama and congressional
Republican leaders moved to end their fiscal impasse but
struggled to strike a deal on the details for a short-term
reopening of the federal government and an increase in the U.S.
debt limit.
    "If there is a temporary stop-gap measure to avert a
disaster of U.S. default, it will lead to the gold market going
even lower," said Jeffrey Sica, chief investment officer of Sica
Wealth, which manages over $1 billion of client assets.
    Gold's sudden price tumble was a result of hedge funds and
institutional investors flooding the gold futures market with
sell orders, traders said.
    U.S. Comex December gold futures settled down $28.70 at
$1,268.20 an ounce by 2:27 p.m. EDT, with trading volume about
10 percent above its 30-day average, preliminary Reuters data
showed.
    Spot gold was down 1.5 percent at $1,266.80, having
earlier fallen as much as 1.8 percent to its lowest since July
10 at $1,262.14 an ounce.
    Friday extended bullion's drop to a fourth consecutive day,
its longest losing streak since late June.
    For the week, the metal was down 3.4 percent, its sixth
weekly decline in seven weeks.

    TECHNICAL BREAKDOWN
    Gold's losses were triggered by a break below key support
between $1,273-1,278, which represents the low from Aug. 7, Oct.
2, and the neckline of a head-and-shoulder continuation pattern,
said Jonathan Krinsky, chief technical market analyst at
institutional trading firm Miller Tabak.
    Technical charts now suggest gold to fall to an area between
$1,110 and $1,120, below June's three-year low at $1,180,
Krinsky said.
    As a gauge of investor interest, the gold holdings of SPDR
Gold Trust, the world's largest gold-backed ETF, dropped
0.2 percent, or 1.80 tonnes, to 896.38 tonnes on Thursday. That
marked a four-year low.
    Uncertainty over talks to lift the U.S. debt ceiling in 2011
was a main driver for gold to hit record highs at above $1,920
an ounce. This year, sentiment towards bullion is much less
positive, holding the metal in narrow ranges as markets largely
expect the debt limit to be raised, analysts said.