Gold Falls Most Since June 2006

Gold plunged the most since June 2006, leading a decline in commodity prices, on speculation the slump in the dollar will end as the Federal Reserve eases the pace of interest-rate reductions., Bloomberg 3/19/2008 3:48:21 PM

The UBS Bloomberg Constant Maturity Commodity Index fell 61.3866, or 4.1 percent, to 1,428.009 at 5 p.m. in New York, led by declines in soybeans, wheat, cocoa and crude oil. The index of 26 commodities has dropped in three of the past four sessions and is down 9.3 percent from a record on Feb. 29.

The Fed yesterday cut the overnight-lending rate 75 basis points to 2.25 percent, the sixth reduction since September, in a bid to avert a U.S. recession. Analysts had forecast a bigger cut to 2 percent, an expectation that helped spur commodities to record highs as investors sought a hedge against inflation by stocking up on raw materials.

The U.S. Dollar Index, down 5.9 percent this year, rose 0.8 percent, the biggest gain in almost six weeks. Before today, the index had dropped on the prospect of lower borrowing costs.

Inflation concerns had boosted demand for raw materials, sending the UBS Bloomberg index up 17 percent this year before today. That compares with a 9.4 percent decline for the Standard & Poor's 500 Index.

The declining dollar had boosted demand for commodities, which become cheaper for buyers holding other currencies. Investors also purchased raw materials to act as a store of value, Pento of Delta Global said.

The yen and franc also rose against major currencies on speculation investors were exiting carry-trade purchases of commodities that were financed with cheap loans from Japan and Switzerland.

Gold for April delivery fell $59, or 5.9 percent, to $945.30 an ounce on the Comex division of the New York Mercantile Exchange, the biggest drop for a most-active contract since June 2006. Gold reached a record $1,033.90 on March 17.

In 1980, the price tumbled $50 a day from Jan. 22 to Jan. 24. On Jan. 21 that year, the metal climbed to $873, a record that lasted for almost 28 years.

On March 17, commodities dropped by the most ever recorded. The UBS Bloomberg gauge fell 4.6 percent, the largest decline since Oct. 3, 1997, when the data starts. The Reuters/Jefferies CRB Index plunged the most since at least 1956.