Precious Metals Tumble; Gold Off $8.70

Gold, silver and platinum prices dropped sharply Wednesday after a headlong fall in a key commodity price index wiped out any need to hedge against the threat of inflation.

On New York’s Commodity Exchange, August gold lost $8.70 to close at $338.60 an ounce, while August silver sank 11.8 cents to $3.767 an ounce.

On the New York Mercantile Exchange, October platinum tumbled $13.40 to end at $354.30 an ounce.

A flood of selling was unleashed in gold after the Commodity Research Bureau’s index of 21 futures markets plunged through the psychological floor of 200 points to close at 190 points--a six-year low.

“The gauge of inflation is saying there’s no reason to buy gold on the chance that inflation will turn up soon,” said Susan Hammargren at Geldermann Inc.

Gold is a hedge against inflation, and investors run to the metal in times of rising commodities prices to protect the purchasing power of their dollars.

The CRB index has been on the defensive for four straight sessions, but Wednesday’s fall was particularly significant, as the index sank below the 200-point mark.

The government also reported that wholesale prices rose a scant 0.1% in July, further evidence that the tepid economic recovery continues to wring inflation pressures from the economy.

The selloff in gold gathered momentum after fund traders, who manage thousands of futures contracts worth millions of dollars, became aggressive sellers.

The CRB’s recent drop had been precipitated by large declines in agriculture commodity prices, analysts said. On Wednesday, the weakness in coffee and cocoa prices and further falls in grain markets weighed on the index.