Gold Fall to 2-Month Low on the First Day of September

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Gold fell to the lowest in more than two months in New York as a stronger dollar curbed demand for a protection of wealth on the first day of September.

Gold for December delivery dropped as much as 1.89 percent to $1,263.10 an ounce by 12:00 p.m. on the Comex in New York, the lowest since June 18.

The dollar reached a seven-month high against 10 major currencies as data showed U.S. manufacturing expanded at the fastest pace in three years. The greenback has strengthened amid prospects for an improving economy that supports the case for the Federal Reserve to raise interest rates.

U.S. manufacturing activity increased to its highest level in nearly 3-1/2 years in August and construction spending rebounded strongly in July, in further signs of vigor in the economy.

The Institute for Supply Management (ISM) said on Tuesday its index of national factory activity rose to 59.0 last month, the highest reading since March 2011, from 57.1 in July.

A reading above 50 indicates expansion in the manufacturing sector. Economists had expected a pullback to 56.8. August's reading was boosted by a surge in the new orders gauge, which touched its highest level since April 2004.

Separately, the Commerce Department said construction spending increased 1.8 percent to an annual rate of $981.31 billion, the highest level since December 2008. Economists had forecast construction spending increasing 1.0 percent after a previously reported 1.8 percent drop in June.

After gold’s rally in the first half of the year beat gains for commodities, equities and Treasuries, bullion is back to being out of favor with investors.

Hedge funds cut their bullish gold bets for the fourth week in five, sending holdings to a two-month low, U.S. government data show. Open interest in New York futures is the smallest in five years, and assets in global exchange-traded products backed by the metal in August posted the biggest monthly drop since May.

Gold prices fell 2.4 percent since June, heading for the first quarterly loss this year, as signs of faster U.S. economic growth bolstered the case for the Federal Reserve to raise interest rates, cutting demand for an inflation hedge. Holdings through ETPs slumped for the fourth time in five months as escalating violence from Ukraine to the Middle East wasn’t enough to revive buying.

“In an environment of sustainable growth, gold is not very attractive, and higher interest rates cannot be good for gold in the long term,” Jim Paulsen, who helps oversee $357 billion in assets as chief investment strategist at San Francisco-based Wells Capital Management Inc., said Aug. 29. “The days of extraordinary impact from military conflict has diminished.”

Futures dropped 7.6 percent in the past 12 months to $1,290.50 an ounce in New York. The Bloomberg Commodity Index of 22 raw materials fell 3 percent in that time, while the MSCI All-Country World Index of equities climbed 18 percent. The Bloomberg Dollar Index slid 0.5 percent.

The net-long position in gold declined 21 percent to 92,734 futures and options contracts, U.S. Commodity Futures Trading Commission data show. That was biggest decrease since June 3. Short holdings betting on a drop jumped 51 percent to 36,877, while long wagers retreated 8.3 percent.

The U.S. economy, the world’s largest, grew more than previously forecast in the second quarter, government data showed Aug. 28. Orders for durable goods jumped in July by the most on record, while consumer confidence climbed in August, separate reports showed last week. Holdings in the SPDR Gold Trust, the biggest ETP backed by the precious metal, dropped three times in the past four weeks.

A “lack of conviction” is keeping investors on the sidelines, Suki Cooper, an analyst at Barclays Plc, said in a report on Aug. 25. Chair Janet Yellen said Aug. 22 that if progress in labor markets “continues to be more rapid than anticipated,” interest rates may rise sooner than expected, and further increases could be more rapid.

Bullion rebounded 7.3 percent in 2014 as tensions in Eastern Europe, Iraq and the Middle East increased the appeal of the metal as a haven. Almost 2,600 people have died in the conflict between Russia and Ukraine, the United Nations said Aug. 29.

While there are some signs of improvement for the U.S. economy, the recovery is uneven, leaving room for the Fed to continue to hold borrowing costs near zero percent, according to Jeff Sica, who helps oversee $1 billion at Sica Wealth Management.

American consumer spending unexpectedly dropped in July, the first decline in six months, Commerce Department data showed Aug. 29.

“The Fed is not in a hurry to raise rates, and it is prudent to hold on to gold,” Sica, who is based in Morristown, New Jersey, said Aug. 28. “Gold’s gains will stick as the turmoil in Ukraine and Iraq shows no signs of coming to an end.”