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Comex gold rallies depite distress over UK auction

NEW YORK: Comex gold jumped on Tuesday, catching the market at first bearish after Britain's morning bullion sale drew very tepid interest, dealers said.

The UK reserve gold was awarded at $285.25 an ounce, below London's morning fix at $286.15 and the the spot price of $285.90/$286.40 going into the auction.

The recovery started on the Comex, where April gold ended up $3.90 at $290.40 an ounce, moving from a morning low of $284.20 to $292.00, its highest since last Tuesday.

"This is a characteristic of gold, where the market gets sold down in preparation for the auction and then we see some short covering and longs come in," said Leonard Kaplan, chief dealer at LFG Bullion Services.

"It is, one might say, lovely that the Bank of England gets to sell at the lowest possible prices. But that is characteristic of a market where you announce sales like this," he said.

Bullion was dragged up from its knee-jerk bottom of $284.35 an ounce, ending at $289.50/0.25, compared to a late fix at $285.15 and Monday's New York close at $285.50/6.00.

Prices fell immediately after the auction, which concluded the first part of the UK Treasury's plan to modernise its portfolio replacing bullion holdings with dollars, euros and yen. The UK intends to cut reserves to 300 tonnes from 715 tonnes.

Demand Tuesday was surprisingly weak, with the sale only oversubscribed 3.0 times. That compared to the 4.3 times at the previous sale on January 25, when the allotment price was $289.50 an ounce.

Bids for 2,411,600 ounces were received, compared to the 3,451,200 ounces bid for in January, the Bank of England said.

"It was a horrible auction," said William O'Neill, director of futures research at Merrill Lynch in New York. "With the recent price decline of almost $40 from the highs on February 7 you might have expected that there would have been a little bit better interest in the auction. Clearly there wasn't."

With five auctions under its belt, the 900-tonne-a-day bullion market seems used to central bank sales and can swallow a mere 25 tonnes easily.

But starting in May, 150 more tonnes will be auctioned in six more 25-tonne sales. By that time Switzerland may have started to put on the block some of the 1,300 tonnes it plans to chop from a 2,600 tonne stockpile.

"The problem with gold is it is not functioning as a monetary asset. Being left to supply and demand devices, it's not in very good shape," O'Neill said.

The auction overshadowed Tuesday's U.S. interest rate hike by the Federal Reserve, which as expected upped the target for the federal funds overnight lending rate, and the less-used but symbolic discount rate, 25 basis points each, saying its saw higher inflation as the main risk to the overheated economy.

These benchmark short term rates are now at 6.0 percent and 5.5 percent, respectively.

Also ignored was news that America's trade deficit had ballooned to a record $28 billion in January.

A sharp rise in silver helped put a floor under gold's morning selloff. May silver rose 9.0 cents to $5.158 an ounce, trading from $5.065 to $5.20, key resistance from March 15.

Spot silver was last at $5.10/12, up from the fix at $5.035 and Monday's close around $5.03/05.

NYMEX June palladium fell $23.40 to $655 an ounce in extremely thin markets. Estimated volume in palladium on Monday was just 65 contracts, compared to an official 63 contracts on Friday. April platinum rose $4.40 to $491.30.-Reuters