By Frank Tang
NEW YORK, Aug 11 (Reuters) - Gold could still weaken further
after it breached a key support level on Monday with a sudden $40
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, and gold could
test even lower levels below $800 during the less liquid summer
sessions, traders said.
"It's clearly a technical break. 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 U.S. Commodity Futures Trading Commission. []
Spot gold <XAU=> ended sharply lower at $820 on Monday, and has
now erased all of its gains this year, while U.S. gold futures for
December delivery <GCZ8> tumbled 4.2 percent, 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 military
conflicts between Russia and Georgia in South Ossetia for gold's
brief initial Monday gains. Gold is seen as a safe haven investment
during turmoil. []
DOLLAR SURGE, OIL WEAKNESS WEIGH
Meanwhile, bullion typically moves in opposite direction to the
dollar as the metal is often bought as an alternative investment to
the U.S. currency. Gold is also used as a hedge against inflation.
On Monday, the dollar rallied to a five-and-a-half month high
against the euro <EUR=>, which breached the $1.49 level. The dollar
has appreciated nearly 7 percent in the past month.
Meanwhile, crude oil <CLc1> ended at $114.45 a barrel on Monday
-- which marked a 22 percent 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.
Dealers said that lackluster physical buying due to weak gold
jewelry demand also weighed.
Top consumer India's gold imports in July fell 56 percent from a
year ago as higher prices kept sales low, although demand is seen to
pick up as prices eased. []
In addition, many investors have been reallocating their funds
into equities and out of the commodities as the outlook for the
global financial markets turned better.
"Everybody's trying to get out the doors. And it broke $850, I
guess they don't want to be in gold now," said Jonathan Jossen, a
gold options trader on the COMEX floor in New York.
Jossen cited a good summer rally in the stock market and
lessened inflation fears due to economic slowdown around the world.
He added that gold could trade as low as $780 an ounce in the near
term.
However, Auramet's Dunn contended it is very difficult to
forecast the near-term direction of gold.
"You could see $750. You could see $900 again. You can't rule
out anything anymore, especially if there is a military escalation
in Iran or something similar happens, and we could go right back
up," said Dunn.
(Editing by Marguerita Choy)
