By Jon A Nones
St LOUIS (ResourceInvestor): Spot gold was last quoted at $804.10 bid, down 3% as compared with the Friday New York close of $832.30. After gaining more than $30 last week alone, $200 since August lows, traders decided to lock in profits today as the U.S. dollar rebounded and currency traders unwound their risky yen carry trades.

On Monday morning, currency traders unwound their risky carry trades, resulting in a surge of the yen versus the dollar. The dollar fell as low as 110.22 yen from 110.61 yen on Sunday, an 18-month low. The Nikkei lost nearly 400 points to 15,197.09 overnight.

In carry trades, investors sell currencies of countries with lower borrowing costs and buy assets with higher interest rates or the prospect of greater yields. Japan has the lowest borrowing costs among industrialized nations at 0.5%.

Dennis Gartman, editor of the Gartman Letter, noted in Monday’s Letter that the yen and the U.S. dollar are “violently stronger” as the unwinding of the yen carry trade and the bearish positions relative to the USD “seem suddenly to be unwound.”

“We have argued here in recent sessions that we've cannot recall having seen any market anywhere at anytime as heavily skewed one side relative to the other as we have seen regarding dollar bearishness,” he said.

Against other currencies, the dollar rose about 0.7% against the euro and 1% against the British pound. The dollar index, which tracks its performance against a basket of major currencies, rose 0.6% at 75.885.

“Our metaphor has been that the dollar's ‘boat’ has been populated to the bearish side so heavily that it was ‘listing’ more than merely awkwardly, and that it was due to capsize. It has ... today... materially,” Gartman added.

Gartman said two things have now changed in the gold market since Friday: The dollar's material strength this morning and the rumours of an OPEC increase in production. Crude prices fell nearly 2% in New York today after rumours emerged that OPEC would discuss the possibility of raising oil production at an upcoming meeting to cool the market.

“A high has been marked, and it may be some while before we add to our long positions in gold,” said Gartman, adding that “$810 may tempt us, but for now, $725 seems like a strangely possible target on the downside, putting the fear of God in everyone!”

Mining and metals shares also dropped on Monday. The Philadelphia Gold and Silver Index [XAU] tumbled 4.7% to 178 points, the CBOE Gold Index [GOX] fell 4.1% to 181.46 points and the Amex Gold Bugs Index [HUI] declined 4.7% to 421.15 points.

Exchange-traded funds such as the StreetTracks Gold Trust ETF [NYSE:GLD] fell 2.9% to $79.78 and the Market Vectors-Gold Miners ETF [AMEX:GDX] fell 4% to $48.30.

Ross Norman, director of TheBullionDesk.com, also gave two factors that have triggered the price collapse: The U.S. dollar relief rally plus the Commitment of Traders (CFTC) report on Friday.

The CFTC report showed that a record long position had been built up in U.S. gold futures, noting that 24 million ounces were held on COMEX in New York plus a further 0.517 million ounces on the CBOT in Chicago.

“With the market heading towards year-end and heavy mark-to-market profits on the books of many trading houses, the temptation to book that profit has clearly overwhelmed them,” said Norman. “Gold was overdue a correction and the failure to breach the record high, coupled with a weaker oil price and higher dollar was taken as a signal to take profit.”

He added that today’s move is thought to have been exacerbated by sell stops being triggered as technical levels failed, which provided further momentum to the downside.

“What remains unclear is whether this is year-end profit taking with dealers looking to be the first to run for cover or a bear trap before a final assault of the all-time high of $850 - before trading in the markets quiets in early December for festive season,” said Norman.

Jon Nadler, senior analyst for Kitco Bullion Dealers, said in an e-mailed note today that the sell-off in markets overseas revealed the beginning of a larger downturn in gold and oil.

“Whether or not the selling could snowball into a more significant but certainly overdue correction remains to be seen, but the speculative abandon with which participants threw money at various markets over the past two months appears to now be skating on thin ice as global conditions have engendered a rise in risk aversion once again,” he said.

However, he told readers to expect some resistance from the bulls against attempts to take values much lower and probably some bargain hunting buying from India.

“For the moment, the level at which conditions might be seen as turning sour is still thought to be found near the $780 range,” said Nadler.

Norman said the “psychologically important $800” level is expected to find good buyers as late-comers look for an entry point. He said that the gold market remains fundamentally bullish and this correction “should be regarded as a healthy development in the medium term.”

“Gold had risen by 14% since early October to recent highs with very little price correction let alone consolidation on the way up,” he concluded.

In New York, gold futures fell $30.30 to $804.40 an ounce, while crude-oil futures declined $1.87 to $94.45 a barrel.

By Arrangement with www.resourceinvestor.com

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