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Gold slides as Japan crisis slams markets

Gold fell 3% on Tuesday and was on track for its biggest one-day loss since July as mounting worries over Japan's nuclear crisis hurt financial markets, prompting a flight to liquid assets like cash.

business Updated: Mar 15, 2011 21:08 IST

Gold fell 3% on Tuesday and was on track for its biggest one-day loss since July as mounting worries over Japan's nuclear crisis hurt financial markets, prompting a flight to liquid assets like cash.

Spot gold fell as low as $1,380.90 an ounce and was bid at $1,390.20 an ounce at 1333 GMT, against $1,426.65 late in New York on Monday. US gold futures for April delivery GCJ1 fell $34.80 an ounce to $1,390.10.

Stock markets in Europe fell to their lowest in more than three months, oil prices tumbled and the dollar index rose 0.7% as risk aversion spiked on fears of a potential radiation disaster in Japan after last week's earthquake.

"The markets were probably overly short on cash," said Commerzbank analyst Eugen Weinberg. "High risk aversion is prompting the taking off of any risk. Even if it doesn't seem logical to move away from gold in the current situation, risk aversion is telling many market participants that cash is king."

But while gold may fall further if the current market unrest continues, he said, in the longer term weakness is unlikely to persist. "Given low interest rates and extremely low real interest rates, it might be a good buying environment for gold."

Other safe-haven assets such as US Treasuries or the Swiss franc rallied after Japanese stocks posted their worst two-day slide since 1987, while the VDAX-New volatility index, which reflects German options volatility, rocketed to its highest since May 2010.

Stock markets in Europe posted heavy losses, while the New York Stock Exchange and NYSE Amex Cash Markets invoked a rule to smooth trading at the market open, as futures pointed to a drop of more than 2% on Japan's nuclear crisis.

Margin calls
Analysts said part of the pressure on gold stemmed from investors cashing in on the metal's 8% rise in the last month on the back of escalating violence in the Middle East to cover losses or margin calls on their equity holdings.

"We argue that it's not unusual for gold to tumble during initial episodes of a severe broad asset sell-off," said UBS strategist Edel Tully in a note. "Investors sometimes have little choice but to sell the yellow metal to cover margin calls and losses elsewhere."

Japan, the world's third largest economy, faces a recovery and reconstruction bill of at least $180 billion -- 3% of its annual economic output.

Gold's move lower comes after rising tensions in North Africa and the Middle East, where Libyan rebels continue to battle troops loyal to Muammar Gaddafi for control of key oil ports, pushed the metal to a record $1,444.40 last week.

Other precious metals were also hammered, with silver tumbling more than 6% to a low of $33.56 an ounce, before edging back to $33.92 an ounce against $35.85.

Platinum prices shed 3.5%, falling to their lowest since mid-December at $1,687.99 an ounce. They were later at $1,701.24 an ounce against $1,749.99.

Major Japanese car makers including Toyota, Nissan and Honda

stopped vehicle production following Friday's earthquake that has crippled roads, railways and ports. Carmakers are the biggest consumers of platinum and palladium.

According to refiner Johnson Matthey, Japan was the largest single national user of platinum in 2010, and accounted for 18% of global autocatalyst demand of 2.985 million ounces.

Palladium fell more than 6% to $693.97 an ounce, its fifth day of losses and its longest losing streak since early August. It was later at $698.22 against $740.