Capital Gold Group Reports: Gold Dips on Profit Taking - Creates Buying Opportunity

By K.T. Arasu

CHICAGO, March 20 (Reuters) - From gold to oil to grains, commodities tumbled on Thursday in a wave of selling as investors cashed out, taking profits at near-record prices and reducing risk from positions built on borrowed money.

Even after the Federal Reserve cut interest rates this week, investors remained jittery about a credit crunch stemming from a distressed mortgage market hammered by record home foreclosures. There also is a growing consensus that the U.S. economy is in recession.

"Little attention was paid to the fact that the sector has been historically sensitive to growth prospects, particularly from the U.S., which for all the talk about Chinese demand, still remains the ultimate end-consumer for many of the commodities in question," MF Global analyst Edward Meir said in a note.

"In addition, the recent selloff may also be attributable to the fact that we are seeing a massive round of deleveraging taking place across many markets," the note to clients said.

He said hedge funds could be lightening up on commodities to support positions that "may be under water," or else they may be raising cash to meet more stringent lending requirements imposed on them by their banks.

U.S. gold prices fell as much as 4 percent to the lowest levels in 4-1/2 weeks, adding to the 6 percent loss on Wednesday, the biggest one-day percentage loss in nearly two years.

Investors have been tapping the bullion market for cash to cover losses in other financial markets. A rebound in the dollar and continued heavy losses in energy markets combined to pressure gold futures.

Spot gold slipped to $920.95/$922.00 a troy ounce at 16:32 GMT, down from $944.20/$945.00 on Wednesday.

Fund managers said the sell-off could have been triggered by the U.S. Federal Reserve's decision to cut interest rates by only 75 basis points to 2.25 percent on Wednesday, when many hoped the Fed would cut rates by a full percentage point.

SELLOFF EXTENDS TO GRAINS

U.S. grains futures also tumbled, with corn and soybeans falling as much as the maximum allowed in a day.

At the Chicago Board of Trade, the world's largest grain exchange, corn futures fell by as much as the 20-cent per bushel trading limit, soybeans by the 50-cent limit and soyoil by the 2.00-cent per lb limit.

"In the big picture you have commodities getting hit because funds are unwinding long commodities/short dollar spreads," said analyst Vic Lespinasse for Illinois Grain.

CBOT May corn fell 19-1/2 cents, or 4 percent, to $5.07-3/4 a bushel at 16:45 GMT, while May soybeans were down 50 cents, or 4 percent, at $12.07. May wheat was down 86-1/4 cents, or 8 percent, at $9.90.

Crude oil fell sharply, extending Wednesday's 4.5 percent drop, as investors cashed out of the market but the losses were pared by news of big-volume imports by China.

"China is increasing crude imports to replenish stocks because it is experiencing extremely cold weather. China's economy is not slowing down and is still a bullish factor for crude oil prices," said analyst Phil Flynn of Alaron Trading.

At the New York Mercantile Exchange, May crude was down $1.35 at $101.23 a barrel at 16:55 GMT, pulling back from a low of $98.65.

U.S. copper futures fell, weighed by profit taking sparked by a rebound in the dollar. Concerns over the economic outlook and a potential loss in demand hung over the market.

May copper was down 5.85 cents, or 1.6 percent, at $3.5750 a lb.

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