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Gold, Silver Slump, Leading Commodities Drop on Dollar, Growth

By Feiwen Rong and Dave McCombs

Aug. 15 (Bloomberg) -- Gold plunged below $800 an ounce for the first time in almost eight months and silver slumped the most in two years, leading a decline in commodities as the dollar gained, reducing their appeal as alternative investments.

Crude oil, copper and corn also fell as the dollar headed for its longest winning streak in more than two years on speculation accelerating U.S. inflation may limit the scope of the Federal Reserve to cut interest rates.

Commodities, measured by the Standard & Poor's GSCI index, have tumbled 21 percent from their record July 3, descending into a bear market, on concern a spreading global economic slowdown would reduce demand for raw materials. Oil is trading near its lowest for more than three months, while copper and corn reached six-month lows this week.

``It's really a reshuffle of assets away from commodities,'' Jon Nadler, a senior analyst at Kitco Minerals & Metals Inc. in Montreal, said in a telephone interview today. ``Investors see that the Fed is resolved to fight inflation by hiking rates,'' which may help push up the dollar, he said.

Gold has dropped 23 percent from its record $1,032.70 an ounce on March 17 and silver has slumped 40 percent from its $21.3550 peak the same day. Gold fell to $789.47 an ounce today, its lowest since Dec. 17, and traded at $796.23 an ounce at 12:38 p.m. Singapore time today, down 1.3 percent.

Hedge Funds

``Once the psychological support at $800 got broken, we saw some stop-loss selling come through until we found new support about $790 when some physical buying came in,'' Charles Dowsett, head of structuring and trading of precious metals at ABN Amro Holding NV, said by phone from Sydney today.

Silver dropped 11.4 percent to $12.56 an ounce, the biggest daily decline since June 2006.

``I expect commodity prices to remain subdued until mid- 2009,'' said Arjuna Mahendran, head of investment strategy at HSBC Private Bank in Singapore. ``The major issue in commodities is the proliferation of ETFs and hedge funds. As they unwind positions, this leads to the price overshooting.''

The dollar has climbed 5.3 percent against the euro this month and reached a 5 1/2-month high today, heading for its fifth weekly gain. U.S. consumer prices rose at the fastest pace in 17 years in July, reducing the ability of the Fed to lower interest rates should the economic slowdown deepen.

Dollar-Driven

The dollar has ``bottomed'' against the euro, Goldman Sachs Group Inc. said in a research note, citing weakening global growth, declining oil prices and an improved U.S. trade balance.

Gold's rally has been ``dollar-driven probably because we are supposedly seeing more writedowns in the European banks,'' said ABN Amro's Dowsett in Sydney. ``We could see gold go all the way down to $750 an ounce.''

Crude oil for September delivery dropped as much as $1.47, or 1.3 percent, to $113.54 a barrel in after-hours electronic trading on the New York Mercantile Exchange, and traded at $113.84 at 12:41 p.m. Singapore time. Copper fell 1.1 percent to $7,305 a ton and corn declined 2 percent to $5.6550 a bushel.

To contact the reporters for this story: Dave McCombs in Tokyo at dmccombs@bloomberg.netFeiwen Rong in Singapore at Frong2@bloomberg.net

Last Updated: August 15, 2008 00:48 EDT