Gold's Recent Slump Bewilders Investors

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"The fact that gold did not head higher during the current leg of the crisis seems to reflect a combination of the rise in the dollar, deleveraging of commodity positions, sales to meet margin calls, and the unwinding of the long gold, short dollar trade," wrote Natalie Dempster, an analyst at the World Gold Council in a research report released yesterday.

...Gold futures hit a historic high above $1,000 an ounce a few days after Bear Stearns was taken over by J.P. Morgan Chase & Co. But in the recent round of crises triggered by the collapse of Lehman Brothers Holdings Inc., gold has fallen to below $700 for the first time in 13 months. The metal has so far lost nearly $170 this month.

The reason, according to analysts at the World Gold Council, is that the latest bout of the credit crisis has been deeper and more far reaching. Funds were forced to sell desired assets such as gold to meet margin calls, while weakness in European economies lifted the U.S. dollar, which then pushed dollar-denominated gold prices lower.

"The fact that gold did not head higher during the current leg of the crisis seems to reflect a combination of the rise in the dollar, deleveraging of commodity positions, sales to meet margin calls, and the unwinding of the long gold, short dollar trade," wrote Natalie Dempster, an analyst at the WGC, in a research report released Thursday.

Among gold's 160,000 tons of above-ground stocks, only about 12% are used in electronic and other industries, and the bulk of gold stocks are used in jewelry and investment. That's why gold's often immune from economic woes and doesn't move in tandem with other commodities. But this time, the yellow metal is falling in line with industrial commodities...

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