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Gold plummets as markets bet on US dollar

Published: 08:06 24 Sep 2011 EDT

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Despite its status as a safe haven asset, gold plummeted this week amid a sharp decline in stock markets, capping the week off with a record daily loss of over US$100 on Friday to hit one month lows.

Traders sold their holdings in gold to cover up losses in equities as stock markets crashed following a downbeat assessment of the economy by the Federal Reserve, which warned of significant downside risks. Rating agency Moody’s added to the gloom, downgrading eight Greek banks and seven Italian banks, raising fears that the European debt crisis may be spiralling out of control.

Reassurances from the Group of 20, which pledged to do all in its powers to preserve financial stability, failed to soothe investors.

As a result, the Dow Jones Index in the US posted its biggest two-day drop since late 2008, while the UK’s blue chip FTSE 100 shed more than 4.5 percent on Thursday.

In the meantime, investors opted for the US dollar, which is seen as an alternative asset to gold, for wealth protection.

Speculation that the gold bubble may be about to burst intensified late in the week amid rumours that hedge funds, which have been buying gold to hedge against market volatility and inflation, have started offloading the yellow metal.

The move by hedge funds was blamed on strength in the US dollar and speculation that gold has been overbought and the current price would not be sustained.

Gold fell from US$1,812/oz a week ago to US$1,657/oz. Silver dipped from US$40.66/oz to US$30.93/oz and platinum slipped from US$1,809/oz to US$1,608/oz.

Shares in major mining companies took a hammering this week. FTSE 100 gold producer Randgold Resources (LON:RRS) dipped from last Friday’s close of 6,955 pence to 6,350 pence. Silver miner Fresnillo (LON:FRES) fell from 1,882 pence to 1,636 pence and platinum miner Lonmin (LON:LMI) slipped from 1,198 pence to 1,077 pence.

In the FTSE 250, gold miner African Barrick Gold (LON:ABG) declined from 592 pence to 569.5 pence.

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