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Gold prices

tanked by double digits Friday with the action driven by a combination of technical selling and rumors that China might raise interest rates.

Gold for December delivery settled $37.80 to $1,365.50 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded as high as $1,410 and as low as $1,359.30 on Friday.


U.S. dollar index

was losing 0.12% to $78.12 while the euro recovered slightly after an early morning decline to $1.36 vs. the dollar. The spot gold price was down more than $46, according to Kitco's gold index.

Gold prices suffered Friday as speculation mounted that

China might raise key interest rates

to combat rising inflation. Thursday's consumer price index showed that year-over-year inflation in the country rose 4.4%, which was higher than expected, despite efforts to take money out of circulation.

China has raised the amount of money banks must keep in reserve multiple times over the past year but inflation still remains an issue. Although inflationary indicators are good for gold as they make the metal more appealing as a safe-haven asset, a rate hike would hurt metal prices.

A rate hike would limit the flow of "free money" in the country which would give consumers less cash to buy gold. Less spending from China could also spell disaster for other countries that depend on strong Chinese consumption.

The weakness also triggered sell stops, which forces a trader to sell his position when the gold price declines to a certain level. New money appears hesitant to come back into the game until the carnage stops.

"Looks like more position sellers from ETFs are starting to appear," says George Gero, senior vice president at RBC Wealth Management "in previous days they were buyers while futures were being sold."

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Gero also noted that open interest dropped in gold on the Comex which signals that rallies earlier this week were actually sparked by short-covering or option-covering rather than new long positions.

An uncertain global economic climate and jittery equity markets are also not helping gold as many investors are selling some of their long positions in gold to raise cash and cover losses elsewhere. Gold has been one of the top-performing assets this year up 27% year to date.

Video: Is Gold a Bubble? >>

"Given the scale of gains posted over the past few weeks the metals remain vulnerable to a deeper correction as traders lock in profits and generate cash to cover margin requirements in other sectors," says James Moore, analyst at

, in his daily metals report.

Jon Nadler, senior analyst at

, a gold believer but with a more conservative outlook, believes that without a real crisis gold prices are due for a deeper correction. "The going has gotten fairly tough around $1,425 or so ... these were largely sentiment and momentum-based gains ... The market I see is a market that believes it received a full $1 trillion from the Fed ... Basically we're not in crisis mode."

Some could argue that Ireland could spearhead the next crisis with the yield on the 10-year bond soaring to 8.32% on Thursday with fears circulating that the country could default on its debt. The country has enough money to pay its expenses through mid-2011, but markets are worried that country will become the next Greece.

Investors were also worried that new regulations on future rescue plans would apply to current European Union bond holders, which would leave bond investors on the hook if Ireland needed a bailout. Eurozone countries said at the G20 meeting that any new restructuring would not apply to "outstanding debt." Traders had been dumping Irish bonds to avoid any new regulations which had pushed yields to new highs.

Ireland's woes left the euro on shaky ground and by extension the dollar as they move inversely to each other. Gold, a dollar-backed commodity, typically takes its cue from the dollar, although that trend can be bucked on days like today, as a stronger dollar makes gold more expensive to buy in other currencies and vice versa.

Uncertainty should continue to provide a choppy trading background for gold. Rumors spread Friday that the EU could provide Ireland with a bailout as soon as next week, but Ireland's finance minister denied these charges.

The Group of 20 meeting in South Korea yielded no concrete currency solutions. The leaders of 20 industrialized nations agreed to end competitive devaluation and have the market fix exchange rates but no specifics were outlined.

Economic ambiguity and currency volatility should be a positive for gold as investors turn to the metal as a safe haven asset. But as gold becomes a trading vehicle and not just a long term investment, prices are at the mercy of stock market fluctuations as traders need cash to cover any losses.

Nadler believes that gold's "parabolic rise" will only balloon into a real deep correction when it comes and that it could be 60% to 80% of current prices. "It will look like a cave in ... the trend change will be something to watch." A 60% correction would leave prices between $800-$900, which is what some analysts believe the real price of gold is if you take speculation out of the market.

Meantime, steep corrections in gold have been met with bargain-hunting as people buy the metal for fear of missing the boat at "discount" prices. But with no buyers in sight Friday, volatility could continue especially on the Comex as traders decide whether to roll over their December futures contracts to February. The deadline is Dec. 1.

Scott Redler, chief strategic officer at

, says that gold's volatility is indicating a top in prices. "The daily swings are getting bigger .... and topping type action equates with violence." Redler recommends taking some profits to scale down one's gold position. "

Gold's not trading well at all."

Silver price volatility has been even more extreme than gold as the thinner market makes it more vulnerable. Prices shed $1.46 to $25.94 while copper closed down 12 cents to $3.89. The eurozone released weak industrial production numbers for September. The result coupled with a possible rate hike in China have investors worried that countries will spend less on infrastructure, which would crimp demand for industrial metals.

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Gold mining stocks

, a risky but potentially profitable way to

buy gold

, were plummeting.

Yamana Gold

(AUY) - Get Yamana Gold Inc. (Canada) Report

was down 3% to $11.68 while

Freeport McMoran Copper & Gold

(FCX) - Get Freeport-McMoRan Inc. Report

was 4.40% lower at $103.26. Other gold stocks

New Gold

(NGD) - Get New Gold Inc. Report


Gold Fields

(GFI) - Get Gold Fields Limited American Depositary Shares Report

were trading at $8.49 and $17.30, respectively.


Written by Alix Steel in New York.

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Alix Steel


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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.