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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.


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

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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.

Sovereign debt worries typically are good for gold as weak currencies and instability highlight gold's appeal as a safe place to preserve one's wealth. But the side effect of a weaker euro and stronger dollar has been putting a crimp in higher gold prices as the dollar-backed commodity becomes more expensive to buy in other currencies.

Volatility in the equity markets has also been spilling over into volatility in gold prices as investors frantically dump gold to raise cash. Next week is also options expiration on the Comex which could trigger more selling. "Gold prices will probably continue to sell off here," says Phil Streible, senior market strategist at Lind-Waldock.

Streible sold gold last week after prices broke $1,400, "prices are going to do two things. Either they will form a head-and-shoulders top and we are going to continue to break down, especially if we take out $1,315 ... or we are going to turn back up and close above $1,380 and if we do that ... it is going to warrant higher prices." Gold prices are trading perilously close to $1,315 an ounce support area.

Despite what some articles have said, gold remained a key holding for some big- named investors in the third quarter.

John Paulson

is still the largest holder of the

SPDR Gold Shares

(GLD) - Get SPDR Gold Shares Report

fund with 31.5 million shares. While

George Soros

dumped 547,689 shares of GLD, he initiated a new position of 5 million shares of the

iShares Gold Trust

(IAU) - Get iShares Gold Trust Report

, the cheapest of all the gold physically backed exchange-traded funds.

>>View John Paulson's Portfolio

>>View George Soros' Portfolio

Silver also shined for investors during the last quarter as prices popped more than 18%.

Bank of America

(BAC) - Get Bank of America Corp Report

added 4.6 million shares of the

iShares Silver Trust

(SLV) - Get iShares Silver Trust Report

, making it the largest holder with 12.3 million shares.

Silver prices

shed 85 cents to $25.23 Tuesday while copper lost 19 cents to $3.72 as worries over a slowdown in China spilled over to the industrial metals. If China stops spending money on construction, infrastructure and real estate, base metals like silver and copper will lose a key source of demand.

Gold mining stocks

, a risky but potentially profitable way to

buy gold

, were sinking.


(KGC) - Get Kinross Gold Corporation Report

was losing 2.59% to $44.74 while

Freeport McMoRan Copper & Gold

(FCX) - Get Freeport-McMoRan, Inc. Report

was 4.89% lower at $97.01. Other gold stocks

New Gold

(NGD) - Get New Gold Inc. Report


Gold Fields

(AU) - Get AngloGold Ashanti Ltd. Report

were trading at $8.37 and $16.68, respectively.


Written by Alix Steel in New York.

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Alix Steel


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