Commodities tumble as investors cash out

By K.T. Arasu

CHICAGO (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.

The decline was the biggest ever as measured by the Reuters/Jefferies CRB commodities index .CRB since its inception 50 years ago. The index, which includes crude oil, gold, wheat, cattle and corn, fell 8.4 percent on the day.

Investors are jittery over the U.S. economy amid a growing consensus that a recession has begun. Many also remain worried about a credit crunch stemming from a distressed mortgage market hammered by record foreclosures, even after this week's interest rate cut and other steps by the U.S. Federal Reserve.

"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 to clients.

"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," he added.

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 Wednesday's 6 percent loss, 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.