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Gold slumps as investors run out of reasons to buy

January 20, 2011 |  3:34 pm

The shine keeps coming off precious metals.

Gold and silver prices continued their new year’s slide Thursday in a sell-off blamed in part on expectations that China soon will raise interest rates further to cool its roaring economy.

Higher rates in China and other emerging markets are siphoning money away from gold and silver as investors weigh where they can get decent returns on their money, analysts say.

January gold futures in New York slid $23.70, or 1.7%, to $1,346.50 an ounce, the lowest closing price since Nov. 17.

Goldatm Silver futures plunged $1.33, or 4.6%, to $27.46 an ounce, the lowest since Nov. 29.

Gold now is down 5.3% from its record high of $1,422.60 an ounce reached on Jan. 3; silver, which peaked at $31.09 the same day, has plunged 11.7% since then.

China on Thursday said its economy grew 9.8% year-over-year in the fourth quarter, up from 9.6% in the third quarter, despite the government’s efforts to slow growth and rein in inflation.

Although inflation eased modestly last month China’s still-hot pace of expansion makes it likely that the government will take more steps to dampen growth -- including via interest-rate hikes that would encourage Chinese investors to keep money in bank deposits.

China’s stock markets on Thursday reflected those credit-tightening fears: The Shanghai composite index tumbled 2.9% to 2,677, its lowest close since Sept. 30.

Fear of slower Chinese growth also hit prices of some raw materials, including oil and copper, on the expectation of weaker demand. Yet many other commodities, including grains, cotton and sugar, rose Thursday.

Matt Zeman, a metals trader at LaSalle Futures Group in Chicago, said gold and silver also are suffering as many investors have lost their fear that the global economy could sink back into recession in 2011.

“Gold was bought primarily over the last year as a risk-aversion play,” Zeman said. The metal jumped 30% in 2010, its 10th straight annual gain, as investors poured in.

But with U.S. economic data continuing to point to growth, and Europe’s government-debt crisis seemingly contained for the moment, the risk-aversion mentality “needs some other big catalyst to get it going again,” Zeman said.

Without that, the market for precious metals “looks to me like it’s in trouble,” he said.

-- Tom Petruno

Photo: A "Gold to go" ATM machine in Town Center Mall in Boca Raton, Fla. The machine, the first in the U.S., dispenses small bars and coins. Credit: Eliot J. Schechter / Bloomberg News