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Gold falls to three-month low as economy jitters fade

July 27, 2010 |  1:12 pm

Gold’s price tumbled Tuesday, driving the metal to its lowest level since late April, as investors continued to take a brighter view of the global economy -- and of risk-taking.

Gold futures for August delivery slumped $25.10, or 2.1%, to $1,158 an ounce in New York.

The metal now has dropped 7.9% from its record high of $1,257.20 reached June 18.

Gold had jumped 13.7% in the first half of the year, driven in large part by fears that Europe’s financial system could unravel as the continent’s government-debt crisis worsened.

But that crisis has faded in recent weeks, and data on the European economy have been surprisingly upbeat. That has given the euro currency a big boost, in turn undercutting gold, which had played the role of the anti-euro for much of the first half.

Lizcoin The euro continued to bump up close to the $1.30 level Tuesday, up from a four-year low of $1.19 in early June.

“We’ve had a significant unwinding of a crowded trade -- long gold, short the euro,” said William O’Neill, a veteran commodities trader at Logic Advisors in Upper Saddle River, N.J.

Meanwhile, a slew of strong corporate earnings reports has helped pull some investors back into the U.S. stock market, also at gold’s expense. The Dow Jones industrial average, which just treaded water  Tuesday and closed nearly unchanged after another weak consumer confidence report, was up 7.7% for the month through Monday.

“There’s more of a risk appetite now,” O’Neill noted.

For gold, the battle now is between short-term traders, who see the metal’s rally as played out for the moment, and the true believers, who see gold as the only refuge from the risk of further government-engineered debasement of paper currencies.

Traders “are just going with the trend,” said Larry Young, president of Covenant Trading in Chicago. “We’re seeing a lot of liquidation.”

Meanwhile, the true believers are led by investors including John Hathaway, who manages the $1.5-billion Tocqueville Gold Fund in New York.

He believes that many more people worldwide will turn to gold in coming years to hedge against paper currencies. Like most gold fans, Hathaway sees higher inflation as the inevitable consequence of the massive money-printing that the U.S. and other governments have undertaken to rescue their economies.

“Against a backdrop of wilting confidence in financial assets, gold is under-owned by central banks, institutions and individuals,” Hathaway wrote in his latest commentary for clients.

He rejects the idea that the metal is a bubble ready to burst, despite nine straight years of gains that have lifted the price from $274 an ounce at the end of 2000.

“One must distinguish between a near-term overbought condition, to which any investment class in a secular bull market can become prone, versus a full-scale mania,” he said. “We are a long way from silly season when it comes to gold.”

-- Tom Petruno

Photo: The world's largest gold coin, a 2007 Canadian Maple Leaf weighing 220 pounds. Credit: Heinz-Peter Bader / Reuters