Gold Falls Below $1,400 on Soft Inflation Data

A gold necklace is displayed at the Dwarkadas Chandumal Jewelers store in the Zaveri Bazaar area of Mumbai, India, on Monday.

Gold dropped below $1,400, approaching prices not seen since its historic plunge a month ago.

June gold futures ended down 2% at $1,396.20 a troy ounce, the lowest settlement since April 19. Meanwhile, silver prices closed at their lowest in over 2½ years, falling 3.1% to $22.658 a troy ounce.

Tame U.S. inflation data helped trigger heavy selling in the gold market, where many investors hold the metal as a hedge against the threat of rising consumer prices. The dollar's sharp rise has also made gold more expensive for buyers using other currencies.

Investors sold precious metals after data showed U.S. wholesale prices fell 0.7% in April, beyond the average economist forecast for a 0.6% drop. With the risk of a rapid rise in prices looking increasingly remote, investors see less of a need to hold gold, an asset that is widely viewed as less vulnerable to the effects of inflation. Gains in global stock markets have also lured investors away from gold this year. And the dollar has jumped against other currencies, on Wednesday hitting its highest level against the euro since early April.

"We were happy to own gold when it was making us money," said Rob Lutts, chief investment officer with Cabot Money Management Inc., a Salem, Mass., an investment manager overseeing about $500 million in assets. As gold prices stagnated and the U.S. stock markets took off, "equities seemed like a much better bet."

Mr. Lutts said the firm has slashed its holdings of gold exchange-traded funds, which store the metal on behalf of investors, by 85% this year.

Gold dropped below $1,400, approaching prices not seen since its historic plunge a month ago. Tatyana Shumsky explains why on the News Hub. Photo: Getty Images.

Outflows from exchange-traded funds have weighed on gold, helping to squelch a rebound after the metal's steep fall in mid-April. Gold futures on April 15 plunged by 9% to $1,360.60, the steepest drop in 30 years. Prices climbed by about $100 over the next three weeks, as buyers snapped up jewelry, coins and other physical gold at the lowest prices since early 2011.

However, investors continued to stream out of exchange-traded funds even as prices rose in late April and early May. The funds have sold about 376 tons of the metal this year, or about 16% of their holdings, according to ETF Securities. The amount of gold held by such funds has fallen in 33 of the 36 trading days through Tuesday.

Gold futures have now fallen on five consecutive trading days.

• "It's the same set of factors, but they're coming together at once for an unusual headwind" to drive gold lower this week, said George Gero, a senior vice president with RBC Capital Markets Global Futures.

Investors are also growing apprehensive about the continued strength of physical demand, which is showing signs of slowing.

Gold coin sales from the U.S. Mint in May are down by two-thirds from April's pace. In India, gold dealers say demand disappointed during India's spring wedding season, which peaked with the Akshaya Tritiya festival on Monday.

Puneet Kapoor, vice president of consumer banking at Kotak Mahindra Bank,500247.BY -0.01% which sells gold coins, said the bank's sales on Akshaya Tritiya came in at about the same level as last year, bucking expectations that the decline in gold prices would spur more buying.

"Looks like [consumers] are waiting for a further correction" in prices, Mr. Kapoor said.

Michael Simpson, a portfolio manager with Toronto-based Sentry Investments, which manages about $10 billion, cashed out of SPDR Gold Shares, GLD -2.31% the largest gold-backed exchange traded fund, in January and February. With gold prices slumping and inflation tame, he shifted his money to equities and bonds.

"I decided I would look for something that pays at least a nominal yield," Mr. Simpson said. "The speculators are leaving" gold.

—Biman Mukherji contributed to this article.

Write to Tatyana Shumsky at tatyana.shumsky@dowjones.com and Matt Day atmatt.day@dowjones.com

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