Gold in 'Sell the Rally' Mode

Updated from 11:57 a.m. EDT

Gold prices were tumbling again Thursday after a failed morning rally induced more hedge fund selling.

Following the pattern of earlier in the week, a morning stab at the psychologically important $600 level quickly failed and gave way to losses. Contracts for December delivery of bullion shed $10.30 to close at $586 an ounce on the Comex division of the New York Mercantile Exchange, having reached an intraday high of $601.80.

And off exchange, the selloff was continuing with prices for bullion delivered in 24 hours trading at $578.20 recently, according to price quotes from dealer Kitco.

"We're in a 'sell-the-rallies' environment," says Bernard Hunter, director of precious metals at bullion bank ScotiaMocatta in Toronto. "We continue to see fund selling in the wake of the central bank sales," that were reported earlier this week.

Although gold tends to move inversely with changes in the U.S. dollar, that wasn't helping the yellow metal Thursday. In the spot market, the dollar was trading at $1.2738, down from $1.2697 late Wednesday. It was also weak against the yen, buying 117.47 yen compared with 117.58 a day before.

Some observers, however, see that relationship holding up in the longer term.

"It's the story of the twin [federal budget and trade] deficits," says Derek Burleton senior economist, at TD Bank in Toronto. "The U.S. will continue to remain dependent on inflows of capital from foreigners," putting downward pressure on the greenback.

TD sees gold prices averaging $670 in 2007, up from a forecast $635 for the end of 2006, according to a report published Wednesday.