NEW YORK/LONDON -- Gold ended down more than 2 percent at a one-week low in New York Thursday as concern over liquidity flared in credit markets and as the unwinding of yen-carry trades led to a sharp surge in the dollar.
"A lot of investment funds are in trouble nowadays and if this continues, they would reduce a lot of risk positions, including gold, in their effort to generate some dollars," said Michael Kempinski, senior precious metals trader at Commerzbank.
"Physical demand is not strong anymore. There is a risk of downside movement in gold," he added.
Spot gold at 3:34 p.m. EDT was down at $661.80/662.60 compared with $674.20/675.00 in New York late Wednesday. Earlier it hit a session low of $659.50.
Most-active gold for December delivery on the COMEX division of the New York Mercantile Exchange settled down $13.50, or 2 percent, at $672.80 an ounce, after touching a low of $669.80, which marked the weakest level since July 27.
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Stocks and credit markets weakened while the yen and safe-haven bonds surged after BNP Paribas suspended three funds hit by problems in the risky U.S. mortgage sector, triggering a new wave of risk aversion.
The French bank said it has suspended the funds as problems in U.S. subprime mortgages and diminishing liquidity are preventing it from calculating their value.
"People are selling gold to raise dollars. It's a classic risk-aversion trade," said John Reade, head of metals strategy at UBS Investment Bank.
"We continue to expect elevated volatility across broad asset markets and while investor positioning in gold and silver is relatively low, any quick increase in risk reduction could see both metals move lower," he added.
U.S. stocks were sharply lower in afternoon trading in New York, with both the broad-based Standard and Poor's 500 Index and the Dow Jones industrial average down 2.5 percent.
In a bid to help calm markets shaken by credit problems, the European Central Bank injected 94.841 billion euros into euro-zone money markets Thursday.
Following ECB's announcement, the U.S. Federal Reserve said it added $12 billion of temporary reserves to the banking system through 14-day repurchase agreements.
CARRY TRADE UNWINDS AGAIN
In previous sell-offs this year, spot gold and gold futures were sold heavily as investors opted for liquidity when they unwound risky bets such as yen-carry trades — the borrowing of the lower-interest yen to buy higher-interest currencies.
"The liquidity crunch in the market today is certainly leading to some liquidations across the board in the commodities market," said David Meger, metals analyst at Alaron Trading in Chicago.
Meger also cited the unwinding of the yen-carry trades for gold's sharp losses. The yen soared Thursday as global credit worries prompted investors to reduce their exposure to risky trades financed in the Japanese currency.
In official gold sales, a spokesman for European Monetary Affairs Commissioner said that only the European Central Bank can decide whether Italy can sell gold reserves held by the Bank of Italy to lower the country's public debt.
Italy's parliament passed a motion last week requiring the government to look into the possibility of selling gold to reduce debt, the largest in the euro zone in absolute terms. Italy is the world's fifth largest holder of gold.
Platinum slipped to $1,268, the lowest since July 30 on news that South Africa's National Union of Mineworkers (NUM) had reached a wage settlement with Anglo Platinum, the world's biggest platinum miner.
Spot platinum was last quoted at $1,269/1,273, down from $1,284/1,288 late Wednesday in the U.S. market, while silver was at $12.63/12.68 an ounce versus $13.10/13.15. Palladium slipped to $359/362 from its previous close of $361/365 an ounce.
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