Gold Drops on Smaller U.S. Economic Stimulus Plan; Silver Falls

Source:

"Gold fell the most in four weeks on expectations the U.S. Congress will pass a smaller-than-expected stimulus package to revive the economy. . ."

Gold fell the most in four weeks on expectations the U.S. Congress will pass a smaller-than-expected stimulus package to revive the economy, easing the risk of accelerating inflation. Silver also declined.

The Senate is expected to vote tomorrow on a rescue plan of at least $780 billion. Gold climbed 5% in January on demand for a store of value amid a deteriorating economy and a surge in government spending. Investments in exchange-traded funds backed by bullion reached a record, and speculators last week raised bets the price would increase.

"Pressure should come from the Senate's likely passage of a stimulus bill that is smaller in size than the one discussed last week," said Tom Pawlicki, an analyst at MF Global Ltd. in Chicago. "Every day that the size of the stimulus grew last week, the gold market seemed to trade higher. That could unwind this week."

Gold futures for April delivery fell $21.50, or 2.4%, to $892.80 an ounce on the Comex division of the New York Mercantile Exchange, the biggest drop for a most-active contract since Jan. 12. The price climbed 2.4% in the previous three sessions.

Silver futures for March delivery declined 33 cents, or 2.5%, to $12.83 an ounce. Silver has gained 14% this year, while gold rose 1%.

The U.S. House of Representatives last month sent a stimulus package to the Senate valued at $819 billion. Last week, the Senate plan expanded to as much as $900 billion before some Republicans delayed passage of the bill.

Gold had climbed on speculation that government spending will spark inflation. Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, rose to a record 867.2 metric tons on Feb. 5.

Speculative long positions, or bets prices will rise, outnumbered short positions by 155,306 contracts on the Comex in the week ended Feb. 3, Commodity Futures Trading Commission data showed on Feb. 6. Net-long positions rose by 14,192 contracts, or 10%, from a week earlier.

The drop in gold prices may be a buying opportunity for some investors. Completion of the stimulus package that the Senate is weighing would raise the government's commitment to solving the financial crisis to $9.7 trillion, according to Bloomberg data.

The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion in the past two years and pledged to provide as much as $5.7 trillion more.

"Trillions of dollars of government spending is coming," said Tom Hartmann, a commodity analyst at AltaVest Worldwide Trading Inc. in Mission Viejo, California. "This injection in spending could spur inflation, and we're seeing plenty of buying based on that thought."

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