Gold pares losses as U.S. service sector expansion disappoints

Gold trimmed its daily losses but remained lower on Thursday after data showed that the U.S. service sector activity expanded at a much slower pace than expected. Meanwhile, the Labor Department reported fewer people filed for initial jobless payments last week than analysts projected, giving a positive sign for the U.S. labor markets healing process. Persisting government shutdown continued to underpin prices.

On the Comex division of the New York Mercantile Exchange, gold futures for December settlement fell by 0.36% to $1 316.00 per ounce at 14:09 GMT. Prices bottomed at $1 302.30 an ounce, while days high stood at $1 317.00. The precious metal rose by 2.1% on Wednesday, the best daily performance since September 18, but extended its weekly decline to 2.1% on Thursday.

Gold traded lower throughout the day as investors assessed whether the U.S. budget crisis will be extended into next week and possibly have a significant negative impact on the worlds biggest economy. The metal however erased some of its losses after the Institute for Supply Management reported that the U.S. non-manufacturing activity rose well below anticipations.

The Tempe, Arizona-based group, said today that its ISM Non-Manufacturing Index fell to 54.4 in September, down from Augusts 58.6 which was the highest since March 2011. This was the biggest decrease since November 2008. Market analysts expected a moderate drop to 57.4. The surprisingly downbeat reading spurred speculation that the Federal Reserve might refrain from trimming its monetary stimulus program any soon.

New orders dropped to 59.6 from 58.6 in August, while activity fell to 55.1 from 62.2 in the previous month, the report also showed. Employment retreated to 52.7 in September, the lowest since May, after hitting a six-month high of 57.0 in August.

Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut, said for Bloomberg before the report: “The gain in services since the end of the second quarter is keyed into domestic conditions in the United States, and the question is how much longer can it keep going if the economy is still growing at 2 percent. One of the factors is housing, and there is some worry that with higher mortgage rates, that might not be going at the same pace.”

The metal however remained pressured after the Labor Department reported that the number of U.S. citizens who filed for initial jobless benefits rose at a minor pace last week but remained at pre-recession levels, indicating a relative strength in the labor markets recovery. The data was overall consistent with yesterdays ADP employment change that showed an improvement but underperformed expectations. The government agency reported that last weeks initial jobless claims rose to 308 000, outdoing projections for a surge to 315 000. The preceding periods reading received an upward revision by 2 000 to 307 000.

The positive data would need a confirmation by the non-farm payrolls and unemployment rate statistics due on Friday. The release of the numbers however will probably be delayed if the U.S. government remains shut, an Obama administration official announced earlier in the week, providing the ADP employment change and initial jobless claims indicators with more weight on current market sentiment.

The four-week average of new claims, which irons out weekly volatility, fell by 3 750 to 305 000, the lowest since May 2007. Meanwhile, the number of people who continued to receive jobless payments confounded analysts expectations and rose by 104 000 to 2.93 million. Economists expected a drop to 2.810 million from 2.821 million a week earlier. The people who had used up their traditional benefits and now receive emergency and extended payments rose by 121 500 to 1.47 million in the week to September 14.