Gold Trades Near Seven-Month Low After Dollar Gain Cuts Demand

By Feiwen Rong

Aug. 13 (Bloomberg) -- Gold traded near the lowest in more than seven months on speculation that the strengthening dollar will reduce demand for the metal as an alternative investment.

The dollar rallied this month on bets the U.S. economic slowdown is spreading to Europe and as commodity prices tumbled. Gold has erased this year's gains and dropped to as low as $802.34 yesterday, a 22 percent decline from its March record of $1,032.70 an ounce.

``The recent sell-off in gold is mainly driven by a strong U.S. dollar,'' Wallace Ng, chief trader for precious metals in Asia Pacific at Fortis Bank, said today from Hong Kong. ``That triggered a lot of long liquidation in gold recently.''

Bullion for immediate delivery added 0.7 percent to $817.71 an ounce at 2:09 p.m. in Singapore, after earlier falling to $805.60. The metal dropped to $802.34 an ounce yesterday, the lowest since Dec. 21. Silver for immediate delivery added 1.4 percent to $14.705 an ounce.

Combined total open interest in gold futures traded on the Comex division of the New York Mercantile Exchange fell to 521,480 lots on Aug. 5 from 650,891 lots on July 15, according to Commodity Futures Trading Commission data.

``That's more than 10 million ounces of gold that has been liquidated only on Comex within a month,'' said Ng at Fortis Bank.

``Technically, spot gold at $800 an ounce is a critical area and if gold prices break that then we will see a further move down,'' Ng said. ``I think gold can rebound slightly before it goes down again, as the market has been very much oversold.''

Technical Factors

``Whilst gold has dropped rapidly in the last few days, we cannot help thinking that it should find some support from factors such as inflation, geopolitical tensions and falling mine supply,'' Darren Heathcote, head of trading at Investec Bank Ltd. in Sydney, said in a report today.

Still, technical charts signal further losses in gold and silver as both ``have broken down through key supports and look set to extend their declines in the weeks ahead,'' Robin Wilkin, head of currencies and commodities technical analysis at JPMorgan Chase & Co. in London, said in a report yesterday.

The dollar traded at $1.4939 at 2:12 p.m. in Singapore, after touching $1.4816 yesterday, the strongest since Feb. 26.

Gold for December delivery added 1.3 percent at $825.10 an ounce in after-hours electronic trading on the Comex division of the New York Mercantile Exchange at 2:13 p.m. in Singapore.

Gold for December delivery on the Shanghai Futures Exchange was little changed at 182.83 yuan a gram ($828 an ounce) after dropping to as low as 179.10 yuan earlier.

In Japan, gold for June delivery on the Tokyo Commodity Exchange fell by 1.3 yen to 2,883 yen a gram ($825 an ounce) at 3:15 p.m. local time.

To contact the reporter on this story: Feiwen Rong in Singapore at frong2@bloomberg.net