Gold in freefall as confidence evaporates

Bullion has fallen a hefty 34 per cent since its peak in August 2011 and there's no sign of a floor in the price yet, writes Glenys Sim.

The gold price has fallen for a fifth straight day to its lowest in 34 months and is set for the worst quarterly slump in at least 90 years amid speculation the US Federal Reserve will reduce stimulus.

Silver is headed for its biggest quarterly loss since 1980.

Spot bullion slid as much as 1.7 per cent to $US1180.50 an ounce early on Friday, its lowest since August 2010.

Prices have dropped 25 per cent since the start of April, the biggest quarterly slide since at least 1920.

The losses are already having an impact on local stocks.

Goldminer Kingsgate Consolidated on Friday warned it would take a $US300 million ($324 million) write-off against its Challenger goldmine in South Australia as it slashed output to cope with the falling gold price.

Kingsgate bought Challenger for $376 million, but operations at the mine were subsequently hit by a series of operating issues that had restricted output and earnings.

Now, with the sharp decline in the gold price, Kingsgate said it would cut output at the mine to 70,000-80,000 ounces of gold a year, down from a target of about 100,000 ounces once production difficulties had been resolved.

The cut in output came as it decided to focus on mining higher grades at the mine. Kingsgate said the Challenger mine was expected to be "cash-flow positive" after a three-month transition period.

It also signalled a significant downgrade to the ore reserves at the mine after a review that was now under way.

On Thursday, RBC Capital Markets told investors there was a heightened risk of a large write-down in asset values at Kingsgate, along with other goldminers such as St Barbara, Silver Lake and Alacer.

Gold is heading for the biggest annual decline in more than three decades.

Investors are selling bullion from exchange-traded products at a record pace as unprecedented money printing by central banks fails to spur inflation.

Analysts from Morgan Stanley to Credit Suisse and Goldman Sachs trimmed gold forecasts this month on the prospects of reduced asset purchases.

"We've had quite a lot of positive data out of the US and people are still focused on the tapering of stimulus, so gold's been hit quite hard," National Australia Bank economist Alexandra Knight said.

"There's definitely been a loss of confidence in gold and that's seen in the [exchange traded fund] liquidations."

US Federal Reserve chairman Ben Bernanke said this month the central bank, which bought $US85 billion of Treasury and mortgage debt a month, might trim purchases this year and end the program next year should the economy continue to improve.

Data this week showed US consumer spending, durable goods orders, consumer confidence and home sales rose in May, even as economic growth in the first quarter was less than previously estimated.

Gold has fallen 29 per cent this year as investors have sold 583.2 tonnes from ETPs, erasing more than $US63 billion in the value of the funds.

Modest inflation growth and concern about the strength of the global economy is also hurting silver, platinum and palladium, which are used more in industry.

The fall in gold prices has left central banks around the world with theoretical losses of $US655 billion, according to estimates.

The price of bullion has fallen a staggering 34 per cent since its $US1908 peak in August 2011.

The total value of gold held in central bank vaults is now worth just $US1.22 trillion, down from $US1.28 trillion at the market peak.

The Federal Reserve faced the largest losses, with the value of its holdings falling from $US323 billion in August 2011 to $US213 billion this week. The US has the largest gold reserves of any nation, making up 26 per cent of all the gold held in central banks worldwide.

The 79.9 tonnes of gold held by the Reserve Bank of Australia are worth $US3.06 billion, down from more than $US4.56 billion in September last year.

Meanwhile, copper and the London Metal Exchange index of six primary metals headed for the biggest quarterly falls since September 2011.

Copper for delivery in three months on the LME dropped as much as 1.3 per cent to $US6660 a tonne. Copper fell 10 per cent this quarter while the LME index dropped 9.9 per cent. The index touched 2911 on June 24, the lowest since June 2010.

China, which is facing a slowing economy, consumes more than 40 per cent of the world's copper.

"What concerns the market most is China's macro conditions," Cofco Futures analyst Liang Lijuan said from Beijing. "Copper has further downside."

On the LME, tin, lead and zinc fell, while aluminum climbed.