Gold Prices Don't Survive Sell-Off

NEW YORK (TheStreet) -- Gold prices were butchered Tuesday as South Korea raised interest rates, the U.S. dollar rallied and investors took profits as equities plummeted.

Gold for December delivery lost $30.10 to $1,338.40 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded as high as $1,364.30 and as low as $1,329 during Tuesday's session.

The U.S. dollar index was adding 1% to $79.31 while the euro resumed its fall to $1.34 vs. the dollar. The spot gold price was down more than $20, according to Kitco's gold index.

Gold prices got hammered again Tuesday as the Bank of Korea beat China to the punch and raised its base interest rate 25 basis points to 2.50%. Investors have been worried since last Thursday that central banks would start raising rates after China reported that inflation rose 4.4% from a year earlier.

One of gold's primary functions is to serve as a hedge against inflation and any steps from emerging-market countries, which have been growing like gangbusters in the last few years, to curb inflation could hurt gold's appeal as a safe-haven asset. In addition, as key rates are raised money becomes more expensive to borrow, leaving companies and consumers with less cash to spend.

"Higher rates are anti-inflationary and holding commodities becomes more expensive," says George Gero, vice president of RBC Capital Markets.

Investors are now even more skittish that China will raise key interest rates and thus hurt demand from the country. According to the World Gold Council, Chinese gold demand in the second quarter jumped 26% to 111.7 tons led by both improving jewelry and investment demand. Any slowdown in the Chinese gold market would reverberate through prices.

While Asian central banks are combating inflation, the U.S. can't seem to spur enough inflation despite the Federal Reserve's $600 billion bond buying program. The core Producer Price Index, which measures prices on a wholesale level and is an inflation indicator, fell 0.6% in October.

Gold prices will also continue to take their cue from the dollar, the euro and Europe's sovereign debt crisis. More rumors are circulating that Ireland is in talks to tap the joint EU/IMF bailout fund for 80 billion euros despite ardent denials out of the country. Portugal also raised the issue of being dumped from the European Union for failing to pass austerity measures and intimated the country might need funding.