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(Kitco News) - Technical and margin-related selling have exacerbated the decline in gold futures, sending the precious metal to an eight-week low Wednesday after previous-day commentary from the Federal Reserve once again dashed hopes for further quantitative easing in the U.S.

Analysts and traders say the market could slip some more as traders unwind existing positions, but they also look for some kind of floor to emerge as forced long liquidation runs its course, traders remain wary about the health of Europe and investors fear that the U.S. and Europe in essence will ultimately try to "inflate" their way out of sovereign debt problems. Physical demand on the price pullback would also be supportive, although one veteran trader says prices may have to stabilize for this to happen.

Around 12:30 p.m. EDT, April gold was at $1,642.50 an ounce, down $51.70, or 3.1%, from Tuesday's pit close on the Comex division of the New York Mercantile Exchange. Much of the weakness occurred in after-hours trading late Tuesday following a post-meeting statement from the Federal Open Market Committee. April gold hit a low of $1,639.20 that was its weakest level since Jan. 17. May silver followed, losing $1.391, or 4.1%, to $32.190 an ounce.

Gold has in essence taken a one-two punch from Federal Reserve comments in the last couple of weeks. On Feb. 29, the metal fell when Fed Chairman Ben Bernanke did not offer any hints for a third round of quantitative easing (QE3) when speaking before Congress. Then hopes for easing dissipated further Tuesday when a statement from policy-setters alluded to some improvement in the U.S. economy.

"With the Fed statement yesterday and the (favorable U.S.) bank stress tests that came out, it just says the Fed is nowhere near QE3, if at all," Lesh said. "They told us things are getting better, although maybe not as fast as we all want."

As a result, some traders who had established long positions, or bought gold, on hopes for further quantitative easing are now exiting, explained Michael Gross, broker and futures analyst with OptionSellers.com.

Some investors in an array of markets appear to be betting that U.S. interest rates will not remain low for the next three years, said Kevin Grady, a veteran Comex floor trader and president of Phoenix Futures and Options. For now, Federal Reserve policy-setters have indicated that they envision the federal-funds rate remaining at extremely low levels until late 2014. But as gold has sold off, yields on 10-year Treasury securities are rising, Grady pointed out. The 10-year yield has been up to 2.249% compared to a low of 1.896% on Feb. 28, the day before Bernanke's congressional testimony roiled the markets.

"It's putting pressure on metals," Grady said.

The moves come on the heels of stronger U.S. economic data lately, he said. In recent days, the government reported that February non-farm payrolls rose by 227,000 and retail sales were up 1.1%.

Meanwhile, the U.S. dollar has firmed in response to the stronger data and FOMC statement, and gold often trades inversely to the greenback. A stronger dollar makes all commodities more expensive in other currencies and thus can hurt demand. Also, this takes away gold buying as a hedge against dollar weakness.

"Gold is trading more as a currency now," Lesh said. "Gold has sort of lost its correlation with the equity markets."

While gold fell Tuesday afternoon, the Dow Jones Industrial Average gained 217.97 points and the Nasdaq gained 56.22 points to close above 3,000 for the first time since 2000.

Much Gold Selling Occurring In Form Of 'Forced' Liquidation

"Right now, people are getting forced out by this move," Lesh said. "It's just liquidation. We've had a huge move down here and the longs are being threatened and taken out."

Liquidation is when traders sell to exit positions in which they previously bought gold. This is occurring as the decline triggers sell stops, which are pre-placed orders triggered when certain chart points are hit. In addition, some are exiting due to margin calls in which they otherwise would have to ante up more money to retain a leveraged futures position.

For April gold, stops were triggered as prices fell below last week's lows, Lesh said. This was $1,663.40. More stops were likely hit as the $1,650 area failed, Gross said.

The decline may also be prompting short selling from traders looking to profit from price dips, Grady said.

"At this point, we don't know if there is a fundamental reason to keep selling gold," Gross said. "However, the technical momentum could easily carry us down to the $1,600 level."

End of Margin Selling, Physical Buying, European Concerns May Offer support

Near-term chart support for gold lies around $1,625, said Lesh and Afshin Nabavi, head of trading with MKS Finance. Below this, Lesh pegged $1,608 and $1,575 for the April futures.

Gold has lacked a so-called "fear" catalyst to attract fresh safe-haven buying lately, Lesh said. Nevertheless, he commented, big price moves—such as the current decline--often end not long after margin-related activity.

"Sometimes that tends to be the end of a move, when you are forcing people out of the market," he said. This means exhaustion of potential short-term selling.

"Whether we're there yet, I'm not sure," Lesh said. "We'll see where we close today. At the moment, the risk is to the downside."

Grady suggested gold may become range-bound between $1,600 and $1,800 for a while. Further improvement in U.S. data could mean more pressure on gold, he said. However, continuing issues in Europe may offer support, with debt worries continuing for nations such as Portland, Ireland, Italy and Spain.

"I think they are far from being out of the woods," Grady said. "The fear factor in that is bullish towards gold."

So far, physical buying has been limited despite the price pullback from the $1,700 area, said Nabavi. The market still feels "heavy" and may re-test the $1,600 region, he said. After recent volatility, some stabilization may be needed to attract the physical demand, he continued.

"The market needs to remain at a price for at least a few days so people come back into the market," he said, adding that the calendar is approaching a popular time of the year for weddings in the key gold-consuming nation of India, with gold often given as a gift.

Gross said he views the recent pullback as largely a "technical washout" after the Fed statement, with selling likely to slow in another session or two. He would favor buying on a pullback toward $1,600.

"The European (debt) problem has been kicked down the road. I don't think anybody is under the illusion it's going away any time soon," Gross said. "In the longer-term picture, most people continue to see Europe and probably the United States eventually adopting a policy of inflating their way out of debt.

"A lot of investors are of that mindset right now. Gold would obviously benefit from an inflation type of policy. The fact so many investors believe that should underpin the gold price and not let things fall too far."

By Allen Sykora of Kitco News; asykora@kitco.com

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