New York (Platts)--27Nov2009/1008 am EST/1508 GMT

Gold futures on the COMEX division of the New York Mercantile Exchange fell sharply Friday with risk appetite seemingly evaporating as financial markets around the world reflected the implications of a new credit crisis that erupted in Dubai earlier this week.

Gold for February delivery, which became the active month earlier Friday, was trading at $1,156.10/oz, down $32.50 from Wednesday's settlement, at 9:18 am EST (1418 GMT) after floor trading resumed for the first time since the Thanksgiving holiday.

On the Globex electronic platform, February gold reached a record intraday high of $1,196.80 on Thursday.

Traders and analysts said that the credit problems in Dubai had triggered a dash for cash and long liquidations in commodities and equities.

DUBAI WORLD DEBT OWED MOSTLY TO BRITISH, OTHER EUROPEAN BANKS

On Wednesday, the government of Dubai asked creditors of state-owned Dubai World for a moratorium on its debt for at least six months. The company is reportedly struggling to pay back $60 billion of debt, most of it owed to British and other European banks. The news has sent shockwaves around the financial world as fears that a wider national credit default in Dubai could occur. As equity markets have fallen, the share prices of banks have been hit hard, especially HSBC and Britain's Barclays.

Equities fell sharply in Asia and Europe and are expected to do so in the US when trading begins.

Gold also fell sharply, with February getting down to an overnight low of $1,135.80/oz, before staging something of a recovery.

"The question is whether or not the crisis in Dubai has given us a much-needed correction, that will present investors with buying opportunities, or whether it's enough to derail the gold bull run," said an analyst. "I think it might be a bit extreme and premature to say the gold bull run is over, but the timing of the situation in Dubai came as a complete surprise. Most people left for Thanksgiving, convinced they'd come back to $1,200 gold."

Earlier Friday morning, before floor trading, February gold did stage something of a comeback, with the market rising above $1,160/oz as the dollar appeared to be faltering again.

As a result of long liquidations in commodities and equities, the euro fell sharply against the dollar to $1.4870 in morning trading in Europe but then recovered slightly to $1.4893 by the opening of business in New York.

Front-month December, which is still fairly active, as some participants roll forward positions into December, was trading at $1,155.50/oz at 9:20 am EST, down $31.50.

In its daily research note Germany's Commerzbank said that short-term investors were the main players that were likely to get out of gold at this stage.

It also noted that high gold prices continued to have an adverse impact on the jewelry sector. It pointed to figures from the Bombay Bullion Association, which showed that India imported between 15 mt and 18 mt of gold in November compared with 34 mt in November last year. India is currently in the middle of wedding season, seasonally a time of peak demand for gold jewelry.

Traders noted that financial markets had been slow to react to the problems in Dubai, gold especially. "We knew about Dubai World on Wednesday, but everyone was so focused on the 10 mt purchase from the IMF by Sri Lanka, which nearly pushed gold up to $1,200/oz," said a trader. "I think we're all now going to be trying to figure out what all this means for gold. The Asians and the Europeans had the advantage over US investors."

Dubai World is on of the largest operators of container terminals around the world and shot to prominence in the US during the Bush administration when it was prevented from acquiring several US port assets on security grounds.

Over the last 20 years Dubai has tried to diversify its economy as its oil and gas reserves drew down. It has branched into such activities as ship repair, taking advantage of passing tanker traffic and winning business from the world's ship repair and conversion capital of the world, Singapore. It has also developed large aluminum smelting operations.

In the last 10 years, there has been a massive debt-fueled construction boom in Dubai, resulting in huge, lavish skyscrapers, hotel complexes and apartment buildings, creating a new skyline in Dubai. Dubai is the second largest of seven emirates that make up the United Arab Emirates and there is speculation that Dubai is likely to turn to neighboring Abu Dhabi for some type of bailout.

--Anthony Poole, anthony_poole@platts.com