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Gold loses its shine. Photo: Quentin Jones
Gold crashed more than $US100 on Friday as a slide turned into a free fall, with weeks of volatility, renewed strength in the US dollar and talk of hedge fund liquidation wrecking its safe-haven status.
The slide made the two-day plunge for the yellow metal the deepest since 1983. Silver fared just as badly with futures posting their worst day since 1987.
More than $US3.4 trillion has been erased from equity values this week, sending a global measure of shares into a bear market, on concern that governments are running out of tools to avert a recession. The Standard & Poor’s GSCI Index of 24 commodities fell to a nine-month low today.
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Gold has dropped 15 per cent since reaching a record $US1,923.70 an ounce on September 6.
The gold sell-off came even after relative calm was restored to the stock and oil markets following Thursday's losses. Bonds also dived with gold and silver as investors took profit on a near week-long rally in US Treasuries.
Widespread talk of possible selling by big hedge funds covering losses in other markets set off one of the biggest routs on record in the precious metals group.
The CME Group, which oversees trading in US gold and silver futures, responded by raising margins, or deposits, required on trades of the two precious metals as well as copper. The move would further squeeze the most optimistic investors in gold, who are trying to hold onto long positions or bets on higher prices.
"We're making new lows and the bull case for gold is on pause for the near term," said Adam Klopfenstein, senior market strategist for precious metals at MF Global in Chicago.
"In the near term, the flight-to-quality interest in owning gold is also out of the window as people are not interested in buying it even in the face of fears in the economy. Until it stabilises, I'm staying out of this market."
Mounting fears this week of a global recession and a deepening Greek debt crisis made investors treat precious metals like any commodity, ignoring the safe-haven appeal that had made them a must-have in times of trouble.
The spot price of gold, which tracks trades in bullion, saw its biggest plunge since the financial crisis in 2008. The plunge took out several key technical supports, including the 100-day moving average for the first time since February.
By late Friday afternoon in New York, spot gold was down about 5 per cent, after falling more than 6 per cent earlier to touch lows from early August.
Spot gold is down nearly 8 per cent over the last two days, while silver futures have lost nearly 25 per cent.
Since hitting record highs above $US1,900 in August, gold has seen extraordinary price swings as some investors, who piled into bullion, began to have second thoughts about it staying as a haven from the euro zone turmoil and potential recession.
The risk-off trade that had benefited gold abruptly disappeared over the past two weeks. The precious metal has begun trading inversely to a newly resilient dollar, as some investors bet the bullion had become overly inflated.
In Friday's session, gold ignored even a dip in the US dollar index as the selling accelerated.
"Gold's fall is a bit surprising. The fact that it has been so volatile lately is perhaps discouraging people from even buying the dips," said Peter Buchanan, senior economist at CIBC World Markets.
By 5:00 p.m. EDT (7am AEST), bullion's spot price was down 5 per cent at around $US1,643 an ounce, after trading between a session peak of $US1,754.71 and low of $US1,628.69. At $US126 an ounce, the intraday move was the biggest on record in dollar terms. It was also more than 5 standard deviations beyond the normal one-day change. On a weekly basis, spot gold fell 9 per cent, its biggest weekly drop since 1980.
US gold futures' benchmark December contract on COMEX settled down 6 per cent, or more than $US101, at under $US1,640 an ounce.
Spot silver was down 14 per cent at a seven-month low below $US31 an ounce. Benchmark silver futures closed down nearly $US6.50 at around $US30.10 an ounce.
Despite those steep losses, spot gold remained up 16 per cent year-to-date due in part to big gains in August. Silver futures, however, turned negative, posting a slight loss.
A New York Times story about hedge funds likely liquidating some of their gold holdings after a year-long rally appeared to spur speculation that one specific manager had been selling, although there was no evidence to bear that out. The story did not name or cite any specific funds as behind the selling.
"I'm sure talk of hedge fund liquidation is helping to pressure things, though there's no confirmation of any single fund selling," said Jonathan Jossen, an independent COMEX trader.
While gold has fallen sharply this week, trading volumes have been strong but not yet near the record levels of August.
By late in the session on Friday, COMEX futures volume of 323,000 lots was 25 per cent above the one-month average, but about a quarter less than recent peaks.
"There are a lot of people saying it's margin calls on other assets, but I think more so it's that there's panic around and people getting out of positions they think are over leveraged and risky," said Matthew Turner, precious metals strategist at Mitsubishi Corp in London.
In April, silver surged to $49.845, a 31-year high. The price has climbed 42 percent in the past 12 months as Europe’s debt crisis boosted the appeal of silver and gold as havens. Reuters, with Bloomberg