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Flight to Cash Guts Gold Prices

NEW YORK ( TheStreet ) -- Gold prices were in free fall Thursday, tanking 2.5% as investors ran to cash in the midst of a broad stock and commodity selloff.

Gold for December delivery closed down $54.10 at $1,720.20 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,768 and as low as $1,711 an ounce while the spot price was sinking $44, according to Kitco's gold index.

Silver prices shed $2.32 to close at $31.19 an ounce while the U.S. dollar index was down 0.18% at $78.27.

All assets from stocks to commodities got pummeled Thursday. Fitch's warning that U.S. banks are at contagion risk if the European debt crisis gets worse, along with higher borrowing rates for Spain and France led a rush into cash.

Gold prices accelerated losses once the price broke below $1,750 an ounce. George Gero, senior vice president at RBC Capital Markets, said sell stops could be triggered -- that is traders are forced to dump positions to protect against losses.

"Hope we hold $1,700 now," says Gero, who also said that fund managers will be reluctant to add more risky assets to their portfolio any time soon. Gold is typically considered safe but its massive volatility -- as investors alternatively buy it as a safety net and then sell it to raise money -- has created a jumpy market.



James Moore, research analyst at FastMarket.com, says that gold is underpinned by safe haven demand -- some argue prices would be much lower if not for the sovereign debt crisis in Europe -- but that prices are in for a turbulent time. "The need to maintain cash liquidity and cover margin commitments will likely see the metal capped by bouts of profit taking, with gold vulnerable in the short-term should a deeper rout in equities emerge."

The fundamental case for gold hasn't changed much, but volatility has become the norm.

Total gold demand in the third quarter grew 6% to 1,053.9 tons, according to a recent report by the World Gold Council. Investment demand was the big driver up 33% while demand for gold bars and coins grew 29% and this was in the midst of a gold hitting $1,923 an ounce and a dramatic 10% selloff in September. The Eurozone debt crisis helped boost physical demand with 30% of total bar and coin demand coming from Europe, a 135% increase from last year. The biggest buyer was Germany but the highest growth rate was France.

Inflows into ETFs also grew 58% to 77.6 tons despite legendary investor John Paulson liquidating a third of his position in the SPDR Gold Shares (GLD). Central bank purchases reached 148.4 tons and could reach 450 tons by year's end.

"Gold has returned as a store of value first, and a trinket second," says Adrian Ash, head of research for the BullionVault.com. "Physical metal is being monetized as coin and bar more surely and steadily than any time since the mid-1930s."

The biggest drag came from lackluster jewelry buying, down 10%. Demand in India fell off a cliff down 26% but the World Gold Council says that buying has recovered slightly. "We would expect Indian demand to pick up but it depends on the currency," says Marcus Grubb, managing director at the World Gold Council.

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