Gold could drop below $800 after key support breach

By Frank Tang - Analysis

NEW YORK (Reuters) - Gold could still weaken further after it breached a key support level on Monday with a sudden $40 tumble, as a powerful formula of a dollar surge, oil losses and a recovering stock market took its toll on investor interest in bullion.

Heavy stop-loss orders were triggered as the metal breached $850 an ounce on Monday, a recent high on long-term chart, and gold could test even lower levels below $800 during the less liquid summer sessions, traders said.

"It's clearly a technical break. It's clearly the oil and it's the dollar/euro. It's a combination of things. You could see some panic here in the gold market now," said Bruce Dunn, vice president of trading at New Jersey-based Auramet Trading.

In spite of gold's recent sharp decline, it has still soared furiously -- it was trading at $250 in 2001 -- as investors poured into the market due to inflation fears and market turmoil. Bullion hit an all-time high of $1,030.80 on March 17.

"The market is just way too long," Dunn said.

Weakened investment interest can be seen by a sharp drop of non-commercial net long positions and open interest -- a measure of market liquidity -- in gold futures, according to a weekly report by the U.S. Commodity Futures Trading Commission.

Spot gold ended sharply lower at $820 on Monday, and has now erased all of its gains this year, while U.S. gold futures for December delivery tumbled 4.2 percent, which marked their biggest one-day percentage drop since March 19.

"Don't be surprised to see it keeps going down to the short side if we continue to see the dollar strength and the crude weakness. It's not oversold yet. Without Russia, I think we could go down to the high $700 levels," said Zachary Oxman, senior trader at Wisdom Financial in Newport, California.