Gold could fall below $800 as dollar rises

New York: Gold could still weaken further after it breached a key support level on Monday with a sudden tumble, as a powerful formula of a dollar surge, oil losses and a recovering stock market took its toll on investor interest in bullion.

Heavy stop-loss orders were triggered as the metal breached $850 an ounce on Monday, a recent high on long-term chart. On Tuesday, spot gold touched $801.90 an ounce, its lowest level since late December, and was at $816.50/$817.45 at 1433 GMT.

The metal could test even lower levels below $800 during the less liquid summer sessions, traders said.

"It's clearly a technical break [$850]. It's clearly the oil and it's the dollar/euro. It's a combination of things. You could see some panic here in the gold market now," said Bruce Dunn, vice president of trading at New Jersey-based Auramet Trading.

In spite of gold's recent sharp decline, it has still soared furiously - it was trading at $250 in 2001 - as investors poured into the market due to inflation fears and market turmoil. Bullion hit an all-time high of $1,030.80 on March 17.

"The market is just way too long," Dunn said.

Weakened investment interest can be seen by a sharp drop of noncommercial net long positions and open interest - a measure of market liquidity - in gold futures, according to a weekly report by the US Commodity Futures Trading Commission.

Spot gold ended sharply lower at $820 on Monday, and has now erased all of its gains this year, while US gold futures for December delivery tumbled 4.2 per cent, which marked their biggest one-day percentage drop since March 19.

"Don't be surprised to see it keeps going down to the short side if we continue to see the dollar strength and the crude weakness. It's not oversold yet. Without Russia, I think we could go down to the high $700 levels," said Zachary Oxman, senior trader at Wisdom Financial in Newport, California.

Analysts cited heightened geopolitical tensions due to conflict between Russia and Georgia in South Ossetia for gold's brief initial Monday gains. Gold is seen as a safe haven investment during turmoil.

Meanwhile, bullion typically moves in opposite direction to the dollar as the metal is often bought as an alternative investment to the US currency. Gold is also used as a hedge against inflation.

Rally

On Monday, the dollar rallied to a five-and-a-half month high against the euro, which breached the $1.49 level. The dollar has appreciated nearly 7 per cent in the past month.

Meanwhile, crude oil ended at $114.45 a barrel on Monday, a 22 per cent drop since a record high $147.27 on July 11.

Wisdom Financial's Oxman said that he would look to profit from any further weakness of the current market by "shorting" gold.

Investors are short when they sell borrowed assets in the hope that they can buy them back when prices have fallen.

"To play the short side, I would keep the stop-loss order at around $870 an ounce. If we break above that, I would expect the down channel to be broken," Oxman said.

"There is a lot of weakness and a lot of people are selling into this and unloading long positions," he said.