Gold sheds its sheen in bullion-dollar 'bloodbath'

Gold sheds its sheen in bullion-dollar 'bloodbath'

By Feiwen Rong and Dave McCombs

Saturday August 16 2008

GOLD plunged below $800 an ounce, silver dropped as much as 12pc and oil, corn and copper slumped as the dollar's rebound drew investors away from commodities after a six-year boom.

Commodity prices have tumbled into a bear market, down 21pc from their July 3 record. Oil traded near its lowest for over three months, gold for eight months and silver for almost a year as copper and corn reached six-month lows.

"Prices have made a peak," according to investor Marc Faber (62), who publishes the Gloom, Boom & Doom Report. He warned: "It could go lower."

Gold fell to $781 an ounce, its lowest since last December. Silver's 12pc drop was the most since June 2006.

Mark O'Byrne, director of Gold Investments in Dublin said: "The bloodbath in the precious metals arena continued yesterday, overnight and this morning and the scale and speed of the sell-off has surprised even the very bearish.

"It is worth remembering that gold's price of 12 months ago was $650 and we are still up 20pc since the start of the credit crisis. No mean feat considering the extent of declines in other markets," he added.

Arjuna Mahendran, head of investment strategy at HSBC Private Bank in Singapore, expects commodity prices to remain subdued until "mid- 2009". He explained: "The major issue is the proliferation of ETFs (exchange traded funds) and hedge funds. As they unwind positions, this leads to the price overshooting."

The dollar has climbed 5.3pc against the euro this month and reached a five-and-a-half-month high yesterday, topping $1.46 to €1 as it headed for its fifth weekly gain.

The rallying dollar was boosted by news that US consumer prices rose at their fastest pace in 17 years in July, reducing the Federal Reserve's scope to lower interest rates further.

Charles Dowsett, head of structuring and trading of precious metals at ABN Amro saidgold's rally was "dollar-driven, probably because we are supposedly seeing more writedowns in the European banks."

"We could see gold go all the way down to $750 an ounce."

Citigroup analysts believe gold will rebound in 2010, as jewellery demand rises and on expectations that the dollar will resume its decline.

The bank's analysts John Hill and Graham Wark wrote in a report: "Longer term, we would not be surprised to see gold double . . . We would be aggressive buyers at current levels."

Crude oil for September delivery, meanwhile, dropped as much as 3pc on the New York Mercantile Exchange to $112.02 per barrel. (Bloomberg)

- Feiwen Rong and Dave McCombs