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China's Slide Drags on Gold

August bullion loses $5 at $658.40 an ounce.

Gold prices were sliding Wednesday after a steep pullback in the Chinese stock market led some speculators to liquidate their bullion holdings.

Contracts for August delivery of gold were shedding $5 at $658.40 an ounce in New York. The

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exchange-traded fund, which holds bars of the metal, was lower also, off 0.6%.

The market was rattled after Shanghai's A Shares index plunged 6.5% in its most recent session. Responsible for the weakness was a decision by the Chinese government to triple the taxes on trading shares in an effort to reduce what was seen by many as an overheated stock market.

Jon Nadler, an analyst at Montreal bullion dealer Kitco, says speculative activity has been the primary factor driving Chinese stocks lately, and the sharp correction in Shanghai inspired traders to swap part of their gold holdings for cash.

When speculators experience severe losses, such as they did overnight in China, they sometimes liquidate their holdings in other markets to wait for things to settle out. Hence, there can be a spillover effect to areas which, on their face, may seem totally unrelated.

Meanwhile, Virtual Metals, a London-based specialty consulting firm, issued a report suggesting that weakening market fundamentals could undermine the bull case for gold in 2007.

This year, the supply of gold will exceed demand by 250 tons, or about 7%, according to the report. The surplus compares with an estimated deficit of 48 tons in 2006.

So far, the impact of the excess has been more pronounced in the second quarter than in the first three months of the year, according to Matthew Turner, an analyst at Virtual Metals. He points to reduced demand from ETFs, higher sales by central banks and activity in financial derivatives products as the main reasons for the change.

Turning to the official sector, the European Central Bank says it sold 191 million euros of gold and receivables last week, or about 12 tons, down from around 17.5 tons in the prior period.

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and

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were each falling more than 1%, in recent action.

As for base metals, copper prices were losing 5 cents at $3.27 a pound in New York.

Elsewhere, Friedman Billings Ramsey issued a report upping its stock price target on shares of

Century Aluminum

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to $64 from $55. "Increased production, lower unit costs, and strong free cash flow," were cited as the key reasons.

Shares of Century were recently gaining 0.3%.