Gold Plummets as Investors Scramble for Cash

NEW YORK (TheStreet ) -- Gold prices tanked Thursday as investors dumped gold for cash after the Federal Reserve's downgrade of the U.S. economy fueled panic over a global double dip recession and led to a deep selloff in stocks.

Gold for December delivery closed $66.40 lower at $1,741.70 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,789 and as low as $1,723.20 while the spot gold price was down almost $41, according to Kitco's gold index.

Silver prices fell a massive $3.89 to close at $36.57 an ounce while the U.S. dollar index was adding 0.82% at $78.32. Silver was getting particularly slammed after HSBC's initial manufacturing reading out of China for September fell to 49.4. Anything under 50 signals lack of growth and the number ignited worries that China would slow its economy too fast. Preliminary readings in the Eurozone, France and Germany also fell with Germany's holding right at the 50 level.

Panic over growth was the market's takeaway from the Federal Reserve's Federal Open Market Committee announcement Wednesday. Its decision to launch operation twist -- buying longer dated Treasuries and selling shorter term ones -- was not a surprise, but its downgrade of the economy was. The Fed now sees "significant downside risk to the economic outlook" and investors think twisting is far from aggressive enough to combat that.

Vote: Where will gold prices finish in 2011?

Investors rushed to the exit and piled into the U.S. dollar, about $3 away from its 52-week high, and Treasuries. Gold typically benefits from any big move into safety, but a stronger dollar was pressuring prices as was the need for cash. At its high Wednesday gold was up 28% for the year while the S&P is down almost 10%, which means gold is a prime outperforming asset to sell when times get tough.

Traders have also been expecting some kind of correction to the $1,650-$1,680 an ounce level for a while and this downward move could lead the way.

Oliver Pursche, co-portfolio manager at the GMG Defensive Beta Fund says "starting in mid-August [we] saw a change for the technicals ... gold is taking a breather." Pursche attributes the change to buyer exhaustion around the $1,830 an ounce level. "It is certainly less attractive and then secondly it's investors saying, 'ok I need cash, I am going take it from gold because I am not willing to sell some stocks at these levels.'"

Pursche, however, does think that gold prices will see new records by year end on safe-haven buying. "I can't come up with a reason why there is a lot of downside."

James Moore, research analyst at FastMarkets.com, says that "further corrections below $1800 draw safe-haven demand," not to mention opportunistic buying from India and China as the fall is typically a strong buying season for gold in those emerging market countries.

At the Denver Gold Forum this week, Paul Walker, global head of precious metals at GFMS, a research consultancy recently purchased by Thomson Reuters, said that during a recent trip to India he couldn't get into gold stores in some regions because there were so many customers inside eager to buy the metal.

The expert says that India continues to buy on price dips and that there is a lack of scrap gold coming out of the country -- a sign of hoarding.

India "can suck in huge amounts of gold in a very short amount of time," he says, estimating that India could import more than 1,000 tons of gold in 2011 -- "a record level at record high prices." For comparison, SPDR Gold Shares(GLD) holds 1,252 tons.

Walker also sees bar hoarding and strong coin demand in China as inflation remains high, interest rates remain negative and investors look for a safe place to invest. "The market is moving in relatively unchartered territory," said Walker.

Gold mining stocks got killed Thursday. Kinross Gold(KGC) was down 7.71% to $15.69 while Yamana Gold(AUY) sunk 10% at $14.75. Other gold stocks, Agnico-Eagle(AEM) and Eldorado Gold(EGO) fell at $64.15 and $18.25, respectively.

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--Written by Alix Steel in New York.

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