PRECIOUS-Gold drops 3.2 pct, government shutdown fails to trigger rally
* Gold set for biggest one-day drop in three weeks
* Market talk of fund liquidation triggers stop-loss orders
* Selling specific to gold as dollar down, S&P higher
(Adds comment, details, updates market activity) NEW YORK/LONDON, Oct 1 (Reuters) - Gold prices sank more than 3 percent on Tuesday as investors sold on frustrations that the metal did not rally after the U.S. government's partial shutdown, putting the safe-haven metal at its lowest in almost two months. Gold, silver, copper and crude oil all fell particularly hard with strong volume noted around the opening of those U.S. markets. The early activity stirred market talk of forced liquidation by a distressed commodities fund and of selling related to a fund rebalancing on the first day of the third quarter. "Somebody put in a big sell order," said Axel Merk, portfolio manager at Merk Funds, which has $450 million in currency mutual-fund assets. A drop in the dollar and gains in U.S. equities suggested that the reason behind Tuesday's selloff was gold specific, as a large investor most likely needed to raise cash by selling gold futures, Merk said. Gold futures prices dropped $25, or 2 percent, to an intraday low of $1,284 an ounce in just 10 minutes between 8:30 and 8:40 a.m. EDT. Selling had accelerated after prices fell below key support at $1,310 and $1,300 an ounce. A fifth of the day's volume so far changed hands in that 10 minutes. The U.S. government partially shut down for the first time in 17 years on Tuesday in a standoff between President Barack Obama and congressional Republicans over healthcare reforms.
Some investors had anticipated gold prices would rally further on uncertainty related to the government shutdown. Spot gold fell 3.2 percent to $1,284.79 by 1:00 p.m. EDT (1700 GMT), on track for its biggest one-day drop in about three weeks. Bullion earlier hit $1,282.59, lowest since Aug. 8. U.S. Comex gold futures for December were down $41.70 at $1,285.30, with trading volume on track to exceed its 30-day average, preliminary Reuters data showed. The dollar fell early in the session but has since turned mixed, while U.S. equities rose almost 1 percent, showing some resilience to the government shutdown. Investors fear a prolonged closure could derail the U.S. economy's tentative recovery. After posting its best quarter in a year for the July-September period, funds could now book profits with little incentive to buy the metal, which is still down some 23 percent on the year after a two-day $225 drop in April. Jonathan Jossen, a Comex gold options floor trader, said selling related to huge bearish bets in December put options might have also pressured gold futures.
DEBT CEILING Traders are paying closing attention to the U.S. debt ceiling deadline in mid October. Failure to raise the $16.7 trillion borrowing limit then could force the United States to default on some payments, an event that could cripple its economy and send shockwaves round the globe. "The market had priced in a screaming rally off of it (Congress deadlock). When it didn't materialize, that triggered stop-loss orders in gold futures," said Frank McGhee, head precious metals dealer at commodities brokerage Alliance Financial LLC. During the 2011 debt-ceiling crisis, an agreement was reached only at the last minute, helping send gold to record high of $1,920 an ounce in September 2011. Among other precious metals, silver fell 3.3 percent to $20.93. Platinum was down 1.8 percent to $1,374.10 an ounce, while palladium fell 0.8 percent to $715.47 an ounce.
Prices at 1:00 p.m. EDT (1700 GMT)
LAST NET PCT YTD CHG CHG CHG US gold 1285.30 -41.70 -3.1% -23.3% US silver 20.965 -0.007 -3.4% -30.6% US platinum 1380.10 -28.00 -2.0% -10.3% US palladium 718.85 -8.30 -1.1% 2.2% Gold 1284.79 -42.15 -3.2% -23.3% Silver 20.93 -0.71 -3.3% -30.9% Platinum 1374.10 -24.70 -1.8% -10.6% Palladium 715.47 -6.03 -0.8% 1.9% Gold Fix 1290.75 -41.50 -3.1% -22.4% Silver Fix 21.70 2.00 0.1% -27.5% Platinum Fix 1377.00 30.00 2.1% -9.6% Palladium Fix 719.00 7.00 1.0% 2.9%
(Additional reporting by A. Ananthalakshmi in Singapore, Silvia Antonioli and Veronica Brown in London; Editing by James Jukwey and Bob Burgdorfer)