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Gold loses shine as investors cash in

Investors selling gold to buy dollars, betting on strengthening US currency – as happened when Lehman Bros collapsed in 2008

Gold, the favourite currency of conspiracy theorist Glenn Beck and modern-day prospectors, is losing its lustre.

The gold price crashed on Wednesday as spooked investors decided to cash in after a record boom in the price of the precious metal.

Analysts said investors were selling gold to buy dollars, betting on a strengthening US currency. They noted, worryingly, that a similar trend occurred after the collapse of Lehman Bros in 2008, a collapse that ushered in the worst recession in living memory.

Gold is a traditional safe haven during dark financial times. It has become such a popular investment recently that gold investment firms have hired top US media stars like Beck to shill for their firms.

New gold prospectors are taking to the Californian hills in search of fortunes that few are finding. And in Utah, Tea Party activists successfully pushed to have gold made a legal currency again, fearing the dollar wasn’t worth the paper it’s written on.

“Gold has been a pseudo-currency for traders,” said Stuart Rosenthal of Factor Advisors. “It’s been a vote of no confidence on the US dollar,” he said. Now traders have changed their mind and are selling gold to buy dollars.

Amid the financial malaise, the gold bugs have enjoyed a record run. The ancient currency first topped ,000 an ounce in March 2008 and analysts have predicted it will reach ,000 in the next year. But gold dropped to ,742 an ounce in early trading Wednesday, a fall of 4%. The price of silver too, which has enjoyed a similar boom, also collapsed.

With stock markets around the world falling, investors appear to be betting that worse is to come. The price of oil – the commodity that most closely linked to economic activity – has been falling recently, driven down by concerns about slowing growth in developed economies such as the US and western Europe. Copper, coffee and sugar prices all fell on Wednesday.

But it is the fall in gold prices that has caught most people by surprise. “We saw a similar development in late 2008,” said Neil Meader, research director at GFMS, a metals consultancy. As Lehman Brothers filed for bankruptcy and global markets headed for armageddon, “there were a lot of developments that you would have thought were pro-gold,” he said.

Instead, gold prices weakened. They were “overwhelmed by a rush to de-leverage,” he said, meaning investors were so scared they decided to take their money and run. If that meant selling their gold, that’s what they did.

Meader said the primary reason gold was falling this time was that the dollar was rising. “The dollar and gold tend to be negatively correlated. Even though we are far from out of the woods in the Eurozone or the US, gold has suffered because the dollar has strengthened.”

But gold could still come back, says Meader. He predicted gold could still be worth ,000 an ounce a year from now. For that to happen the dollar will have to weaken. It hit an eight-month high against the euro, and has strengthened against the pound enough to dampen many UK people plans of a New York Christmas shopping trip.

Gold is still not falling as hard as the stock markets, said Rosenthal. “One day does not a pattern make,” he said. “But it’s hard to ignore.” © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds