Security guards count several one kilo gold bars inside a secured vault in Dubai April 20, 2006. The global flight from risk knocked precious metals again on Friday, with gold falling below $650 an ounce for the first time in three weeks as shaky global stock markets prompted investors to reduce positions in commodities. (Tamara Abdul Hadi/Reuters)

NEW YORK/LONDON (Reuters) - The global flight from risk knocked gold and silver hard for a third straight day on Friday, with bullion falling below $640 an ounce for the first time in 1-1/2 months as funds and currency investors cashed out on precious metals to pay for losses in other markets.

Investors often buy gold as a safe bet when financial markets look unstable, but investors are keen to unload the metal after plunges in global equity markets this week, analysts said.
Many investment funds were seen to have bought commodities, including gold, over the past month with the proceeds from stocks as Wall Street reached record highs last month.

By 3:56 p.m. EST (2056 GMT), spot gold was quoted at $642.70/643.40 per ounce, down sharply from $662.60/663.30 late in New York on Thursday. It fell as low as $639.80 on Friday, the lowest level since January 24 and down nearly 7 percent from the nine-month high touched on Monday.

Most-active gold for April delivery on the COMEX division of the New York Mercantile Exchange settled down $21.00, or 3.2 percent, at $644.10 an ounce, after bottoming at $641.30, a 1-1/2-month low. It hit a session high of $668.20.

YEN CARRY TRADE HURT

Carry trades, in which investors use low-yielding currencies like the yen as a cheap source of funds to buy higher-yielding currencies and assets, were largely to blame for Friday's sell-out in gold futures, analysts said.

This is because the yen rose to an 11-week high versus the dollar, and currency traders needed to close out their positions in gold futures to unwind bets on riskier assets that were financed by borrowing the Japanese currency.

"It seems that traders that are in the carry trade are obviously continuing their mass exodus. The money is coming out of gold and silver, mostly futures, where many of the carry traders have used gold and silver to park some of their carry trade profits," said Phil Flynn, vice president and senior market analyst at Alaron Trading.

James Steel, analyst at HSBC, said that as yen carry traders unwound their currency positions, it would force them to close out the long gold positions.

Steel also said that general weakness in the emerging markets was a big factor in gold's decline.

"Near term, I am still a little bearish. But I think it's going to be fundamentally very attractive quite soon. We will have to see how much further the correction has got to go," Steel said.

SAFE-HAVEN BID UNSEEN

Gold is often used by investors as a safe haven in times of financial uncertainties, but analysts said that this time funds opted for cash and to pay off losses because of the equities rout.

"It's one thing for people to run around and say it's a great diversifier and a safe haven to all the risks. But the fact is, when things start going bad, people tend to liquidate their gold holdings in order to pay for the bad stuff," said Bernard Hunter, director of precious metals at ScotiaMocatta.

"When equity markets start going down badly in particular, and people start getting calls for margins, gold seems to be one of the first things that people liquidate in order to raise cash to pay for losses on other products," Hunter said.

Dresdner Kleinwort analysts said in a market report that gold was not glittering any longer as a safe haven.

"Commodities in general are perceived as risky assets ... This asset class is just sold to reduce portfolio risk and to take profits in order to compensate losses suffered in other assets like equities," the bank said.

"Thus, as long as unwinding of yen carry trades continues and equity prices head south, gold and silver remain in the wake of bear markets."

Silver followed gold to trade sharply lower. It was last quoted at $12.89/12.94 an ounce, a level last seen on January 19, sharply below Thursday's late U.S. quote of $13.56/13.61. The white metal also dropped about 4 percent on Thursday.

Platinum fell to $1,200/1,205 an ounce from its previous close of $1,236/1,241 in New York, while palladium was down $3 at $344/347 compared with its late quote in New York.

(Additional reporting by Chikafumi Hodo in Tokyo and Doris Frankel in Chicago)