Gold breaches below $830 on panic, liquidity needs

By Frank Tang and Jan Harvey

NEW YORK/LONDON (Reuters) - Gold dropped as much as 9.6 percent on Friday, reversing sharp morning gains as a wave of panic prompted investors to dump assets across the board to meet liquidity needs.

Gold traded in a wide range of more than $100 an ounce on Friday, capping a volatile week with gains of only 1.3 percent even as global stock markets lost heavily.

Bullion in overnight trade touched a 2-1/2 month high of $931 as a slide in the global equity markets sent investors racing to a safe haven from the financial crisis.

However, even gold could not withstand relentless selling across all asset classes as investors sought cash to cover margin calls amid steep losses in stocks. It hit a low of $823.50.

Spot gold dropped to $845.80 at 2:50 p.m. EDT (1850 GMT), down 7.2 percent from Thursday's nominal close at $911.50.

"It's total panic. People are so scared that they are looking to liquidate everything that has cash value and to stay away from everything," said Bruce Dunn, vice president of New Jersey-based Auramet Trading.

Dunn cited a sharp rally of the dollar and heavy losses in crude oil for gold's dramatic turnaround on Friday

"It's clearly euro-dollar related. It's also Friday so conditions are thin," Dunn said.

Gold has been underpinned in recent weeks by interest in bullion as a haven from risk as markets descended into chaos. But that has not been enough to support it as losses have intensified.

"The flight to quality into gold and possibly silver is not necessarily a valid approach to the market right now," said Alan Plaugmann, head of futures and options at Saxo Bank.

"The majority of people are favoring cash and fixed income over pretty much any other asset class out there."

The gold contract for December delivery settled down $27.50, or 3.1 percent, at $859.00 an ounce on the COMEX division of the New York Mercantile Exchange.

U.S. stocks fell sharply at the open, with the Dow sinking as much as 8 percent, but recovered to trade 1 percent lower in an extremely volatile session. .N

European stocks dived more than 8 percent, swept up in a global sell-off, as investors worried concerted efforts from governments and central banks to stabilize the financial markets would fail to avert recession.

Turmoil on the equity markets sparked a broad-based sell-off in commodities.  Continued...