Silver, gold tumble further on dollar, liquidation

By Rujun Shen

SINGAPORE (Reuters) - Spot gold fell by more than 4 percent and silver suffered its sharpest one-day loss in three years, extending Friday's rout as invstors bolted for the ultimate safe havens of cash and the dollar.

A debt crisis in the euro zone that could infect the global economy is causing a widespread flight to safety that has hammered commodity markets across the board.

Spot gold dropped to $1,582.69 an ounce, bringing losses so far this month to 13 percent, the biggest decline since the financial crisis in October 2008.

Cash silver lost 14 percent to an eight-month low of $26.65, on course for the biggest daily drop in almost three years.

"Many have highlighted the risks of gold being in overbought territory, having gone up in a straight line in the past four years," said Song Seng Wun, a regional economist at CIMB Research in Singapore.

"With recessionary pressure piling up, flight to safety means flight to really safe investments, and those are the U.S. dollar and U.S. Treasuries."

U.S. gold futures fell 3.2 percent to $1,587.30 an ounce, and U.S. silver tumbled 12 percent to $26.50.

The dollar, which has rallied nearly 6 percent so far this year against a basket of currencies, touched a seven-month high as investors fled risky assets to seek a safe haven in the greenback.

"The dollar still has room to strengthen more in the short term because the fear of crisis is not over," said Dominic Schnider, head of commodity research of UBS Wealth Management in Singapore.

A stronger dollar pressures gold as it becomes more expensive for buyers holding other currencies.

European policymakers began working on new ways to stop fallout from Greece's near-bankruptcy from inflicting more damage on the world economy after stinging criticism for failing to stem the debt crisis.

MARGIN INCREASE

Adding to the bearish sentiment, the CME Group raised margin requirements on gold, silver and copper futures contracts on Friday after market volatility rose dramatically in the past few weeks, raising the cost of holding positions.

Speculators cut bullish bets in gold futures and options for the sixth time in seven weeks in the week ended Sept. 20, as the price of bullion continued to unravel from its record.

Spot gold fell 8.6 percent last week, its sharpest such drop in more than 28 years.

"Retail punters are scared," said a Singapore-based trader.

"There is a big dollar buying frenzy now, which is dragging everything down and people have to liquidate just like 2008."

In 2008, spot gold prices initially shot up after Lehman Brothers' bankruptcy, but soon tumbled more than 25 percent within two weeks in October.

Prices of other precious metals also tumbled. Spot platinum dropped to a 13-month low of $1,504.68.

Spot palladium fell to an 11-month low of $608.99.

(Editing by Michael Urquhart)