Gold Prices Sink Further After Earthquake

NEW YORK (TheStreet ) -- Gold prices retreated from record highs Tuesday as investors took profits once the yellow metal blew past $1,900 an ounce.

Strong manufacturing data out of China and Germany as well as a surprise earthquake in Virginia accelerated declines.

Gold for December delivery closed down $30.60 at $1,861.30 an ounce at the Comex division of the New York Mercantile Exchange, although prices were down an additional $50 in after-hours trading. The gold price traded as high as $1,917.90 and as low as $1,851.90 during the session, while the spot gold price tanked more than $60, according to Kitco's gold index.

Silver prices settled down $1.03 at $42.29 an ounce. The U.S. dollar index was down 0.34% at $73.89 while the euro was flat vs. the dollar.

HSBC sparked the selloff in gold Tuesday after it said its gauge of manufacturing activity in China rose to 49.8 from 49.3 in July. Although that number is under the 50 point growth level, some experts say that it signals a soft landing in China -- that recent rate hikes have not stymied growth altogether.

Vote: Where will gold prices finish in 2011?

Manufacturing activity in the Eurozone and in particular Germany were also better than expected at 49.7 and 52, respectively. Investors had been dreading a global slowdown after the Germany's economy showed almost no growth in the second quarter.

The Shanghai Gold Exchange also raised margin requirements on gold futures contracts, the second time this year, by 1%, making investors pay more up front to buy gold. Traders worried about the CME following suit could be rotating out of some of their gold contracts.

Gold prices also blew past $1,900 in overnight trading, triggering a wave of profit taking. "Should we have changes in asset allocations with a show of stability in stock markets we could see a pullback below $1,825," says George Gero, senior vice president at RBC Capital Markets, especially if sell stops are triggered below $1,850, meaning that traders are forced to sell.

Many experts think, however, that any dips will be met with strong buying and help curb a deeper correction. "The inability of asset managers to find other well performing areas is keeping gold in portfolios," says Gero.

"Demand for gold appears to be broad based," says James Moore, research analyst at FastMarket, "with the US Mint reporting MTD Eagle coin sales in excess of 90,000 in contrast to SPDR Gold Trust(GLD), which declined by 6.3 tons yesterday and as a result we expect any correction to be supported by strong dip-buying interest."

Phil Streible, senior market strategist at MFGlobal, doesn't think that gold prices will fall back to the $1,680 level, which is the technical level many analysts point to as a key support, but that they will fall. "You have to look at some of these previous peaks," says Streible, like $1,725 and $1,800 an ounce levels, "use those as support levels and then start nibbling at the market there."

A slew of positive news or, on the flip side, any need for investors to liquidate assets for cash, could be potential headwinds for higher gold prices. If investors feel better about the economy, they might not seek gold as protection. But if investors are faced with higher margin requirements or another deep selloff in the stock market, gold buyers could dump the metal to raise cash.

Darrell Cronk, senior vice president, regional chief investment officer at Wells Fargo(WFC), was instrumental in writing the investment bank's recent note that said "we can confidently state that interest in gold investing has reached the level of a speculative bubble. Prudent investors should be very wary of having substantial investment exposure to this precious metal in their portfolios." Cronk spoke recently to TheStreet to defend that position in the face of a high gold price.