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Gold Plummets as Inflation Concerns Ebb

NEW YORK (TheStreet) -- Gold prices were plummeting Thursday after the Federal Reserve's decision to scale back its economic stimulus program triggered investor selling on the bet that inflation concerns will ebb.

Gold for February delivery at the COMEX division of the New York Mercantile Exchange was tumbling $40.20 to $1,194.80 an ounce. The gold price traded as high as $1,226 and as low as $1,191.60 an ounce, while the spot price was falling $23.61, or 1.9%.

"Gold sellers [are] disappointed with tapering, Senate accord on a 2 year budget, higher 10-year rates, very strong stocks -- due to all this are causing gold prices to test recent lows," George Gero, precious metals strategist at RBC Capital Markets, wrote in a note on Thursday. "While next year may prove more promising as inflation may rear its head, for now a strong dollar will keep buyers of gold on the sidelines."

Gold witnessed a gargantuan rally to near $1,900 in September 2011 from $800 at the end of 2008 -- a more than 130% gain -- on the back of significant fiscal stimulus and multiple rounds of monetary stimulus.

Many investors view gold as an asset hedge against inflation in fiat currencies, and since much of the gold trade is U.S. dollar-denominated, many market participants made bets that stimulus would devalue the U.S. currency. Hedge fund billionaire John Paulson is one of the more familiar gold-bulls who grabbed huge positions in the precious metal in the years following the financial crisis -- he has since told clients he would no longer personally invest in the space.

Investors will continue to monitor gold at current levels as many technical analysts have said in recent weeks and months that $1,200 an ounce is a key price of resistance -- meaning that enough of a drop below that threshold could trigger massive selling.

While prices on Thursday dipped below $1,200, some gold analysts argued that the Fed's continued quantitative easing (despite a slight pullback) and loose monetary policy by the European Central Bank, Bank of England and the Bank of Japan still give reason for investors to watch for inflation a few years out.

"I don't subscribe to the theory that it's all over for the bullion market," David Govett, head of precious metals at Marex Spectron, wrote in a note to clients on Thursday. "I do think we will try the downside again, but on the whole, I would be a buyer of dips if we do manage to break below $1,200, with a longer term view of moving back up in the new year."

Silver prices for March delivery were dropping 87 cents to $19.19 an ounce, while the U.S. dollar index was slipping 0.02% to $80.57.

Gold mining stocks were mostly lower on Thursday, in line with the drop in gold futures. AngloGold Ashanti (AU) (AU) was sliding 3.3% to $11.27, while shares of Barrick Gold (ABX) was off by 1.8% to $16.60.

Gold ETF SPDR Gold Trust (GLD) was decreasing 2% to $115.24, while iShares Gold Trust (IAU) was losing 2.2% to $11.59.

-- Written by Joe Deaux in New York.

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