Tokyo: Gold prices accelerated declines to fall 4.7% on Friday before recoiling slightly, as worries over debt problems in Dubai drove investors to cut positions, unleashing a broad sell-off across assets from commodities to equities.
The Dubai worries pushed Asian equities outside Japan down more than 4%, led by a 5% fall in Hong Kong’s Hang Seng Index, while oil prices shed more than 5%.
Gold’s fall, its biggest single-day drop in a year, dragged its sister metal silver down about 5% while platinum fell 2%.
The selling in risk assets intensified as the dollar rebounded 1% against a basket of major currencies, with concerns over Dubai’s debt problems prompting traders to slash risk exposure and unwind dollar-funded carry trades.
Market players who believe the dollar’s declining trend will extend well into next year are willing to buy gold on dips, possibly slowing the precious metal’s slide.
Gold also receives support from increasing caution among investors over riskier assets as stocks fall, traders said.
“The Dubai issue reminded people of the risk of new economies, resulting in a sell-off in stocks and an inflow of money into the dollar,” said Tetsu Emori, a fund manager at Tokyo-based Astmax Co.
“But gold is suffering less than other commodities or stocks are, and that underlines gold’s relative value and investor confidence over its role as a risk hedge,” he said.
Traders said the focus is on how US markets will react after returning from Thursday’s Thanksgiving holiday.
Dubai struggled to assuage fears of debt default on Thursday after its move to delay repayments at two flagship firms shook confidence in west Asia as a centre for investment and a source of capital.
“Traditionally, European banks are heavily exposed in the middle-east. But how far US banks are exposed is yet to be made clear,” Emori said.
Even if US stocks follow other regions lower and fuel fears about a credit crunch, investors would not sell gold as heavily as at the time of the financial crisis a year ago, Emori said.
“If and when other assets are sold and down, gold will likely hold onto its shine given current low interest rates, making it almost the same as cash,” he said.
Spot gold was at $1,144.00 an ounce by 0827 GMT, after briefly dropping 4.7% to $1,136.80/oz, compared to New York’s notional close of $1,192.60.
With the latest sell-off, gold is set to end the week flat after Thursday’s fresh record high of $1,194.90 before the dollar gained ground on concern that debt problems in Dubai could undermine the global financial system.
If gold ends flat or falls, it would snap a third straight weekly gain.
“Gold has not broken above $1,200 just yet. But I think it could do so any time the currency market turns in favour of gold,” said Tatsufumi Okoshi, senior economist at Nomura Securities Co.
“The currency market is now attracting all of the volatility, so gold cannot help but follow the ups-and-downs of the dollar,” Okoshi said.
Bullion has risen more than 30% this year, including a rise of 12% in November alone on dollar weakness, expectations of further reserve diversification by central banks and fears of inflation next year.
Many expect that more central banks in developing countries will diversify foreign currency reserves into gold.
Sri Lanka’s deputy finance minister Sarath Amunugama said in an interview with Reuters on Thursday the country was considering buying more gold from the International Monetary Fund.
The IMF said on Wednesday it had sold 10 tonnes of gold to the Central Bank of Sri Lanka, part of the 403.3 tonnes approved for sale by the fund’s executive board in September. The fund has already sold 202 tonnes to the central banks of India and Mauritius.
US December gold futures traded at $1,172.50 per ounce, down 1.2% from the previous close.
The world’s largest gold-backed exchange-traded fund, SPDR Gold Trust, said its holdings stood at 1,127.860 tonnes as of 25 Nov, unchanged due to a holiday on Thursday.