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UPDATE 1-Liquidity deficit speeds up record Shanghai gold rout

Published 21/07/2015, 01:26 am
© Reuters.  UPDATE 1-Liquidity deficit speeds up record Shanghai gold rout
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(Adds comments from U.S., European investors)

By Manolo Serapio Jr and Clara Denina

MANILA/LONDON, July 20 (Reuters) - A lack of liquidity hastened gold's 4 percent slide in a matter of minutes on Monday after a record 3.3 million lots of the metal, or 33 tonnes, traded on a key Shanghai physical contract, as top consumer China appears to be shunning bullion.

Spot gold XAU hit $1,088.05 an ounce - its weakest since March 2010 - shortly after the Shanghai Gold Exchange opened, possibly paving the way toward $1,000 per ounce.

Investors have found less and less reason to hold bullion as a safe haven, with the dollar strengthening ahead of what is expected to be the first increase in U.S. interest rates for nearly a decade.

Traders said Monday's sellers had taken advantage of a low-liquidity environment, with Japanese markets shut for a holiday.

"The depth of the selloff looks to have been the result of a short squeeze magnified by illiquidity," said Christophe Donay, chief strategist at Swiss fund Pictet Wealth Management.

Some of the biggest price moves in gold since late October have occurred in Asian hours. ID:nL3N0T907S

Bullion abruptly ended a 12-year rally in 2013, shedding almost a third of its value, as the Federal Reserve started reining in stimulus that had helped the U.S. economy get back on track.

The metal had thrived following the 2008-2009 crisis, as a low-interest-rate environment enticed investors to put money into the non-interest-bearing asset.

But with the U.S. dollar increasingly gaining favour as a rate increase looms, gold faces still more downside risk.

"It looks like the end of an era for gold," said Howie Lee, analyst at Phillip Securities in Singapore, adding that China had been grappling with oversupply after importing a record volume in 2013.

China said on Friday its gold reserves were up 57 percent at the end of June from the last time it adjusted its reserve figures six years ago.

Despite the tonnage increase, gold now accounts for 1.65 percent of China's foreign exchange reserves, against 1.8 percent in June 2009. ID:nL3N100195

"Gold does have a role as part of a reserve asset for a central bank but if you look at China's (central bank), it is too small for them to be a meaningful part of their reserves," a trader at a U.S. fund said.

RECORD TRADE

Just over 3 million lots were traded on a key contract XAU9999=SGEX in Shanghai, compared to fewer than 27,000 lots on Friday, Reuters data showed. Prior to Monday, the volume for July had averaged at fewer than 30,000 lots.

The Chinese have snubbed gold in favour of equities for the most part of this year, fuelling a rally in stock prices before a meltdown earlier this month and subsequent recovery.

"People are worried about the fact that if China starts to falter, the general public there will also start to sell their gold and that would be a big problem for the gold market more widely," the U.S. trader said.

China is the world's largest consumer and producer of gold, with an output of 438.20 tonnes in 2013, according to GFMS Thomson Reuters data.

"Asian gold divestment would have an impact on people trading in the Western world ... at some point it would not surprise me to see gold down below $1,000," the trader added.

Monday marked the sixth straight day of decline for gold, which took a hit last week after Federal Reserve Chair Janet Yellen said the U.S. central bank is on course to raise interest rates this year if the U.S. economy expands as expected.

But the speed and magnitude of Monday's fall shocked some traders, many of whom had been used to gold's lethargic trading this year, despite the Greek debt crisis and China's stock rout.

A Singapore-based trader said stop-loss orders had added to the slump after the Chinese market opened.

Holdings at SPDR Gold Trust GLD , the world's largest gold-backed exchange-traded fund, dropped more than 11 tonnes to 696.25 tonnes on Friday. GOL/ETF

That outflow was the largest in a single day since 2014, said Victor Thianpiriya, an analyst at ANZ Bank.

"Clearly the market momentum is down. We've had a price forecast of $1,100 in the short term, but it looks like the market is certainly trading very much on the weak side and could test levels below $1,100 and stay there for some time," Thianpiriya said.

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GRAPHIC: Gold prices plunge

http://link.reuters.com/daw25w

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Editing by Ed Davies, Veronica Brown and Dale Hudson)

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