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Gold Skeptics, Beware

A pullback may be what was needed on the way to $600, but don't expect the decline to last too long.
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Updated from 1:45 p.m. EST

A plunge in gold prices Tuesday had traders wondering whether a needed correction was already underway following the precious metal's surge since late last year.

Gold for April delivery plunged, losing $19.50, or 3.4%, to $554.80. That's more than 4%, below the 25-year highs of $580 touched last week.

The drop in prices was being attributed partly to the belief that tensions might ultimately be eased with Iran, whose nuclear ambitions have sparked a standoff with the member countries of the United Nations Security Council. Chinese foreign minister Li Zhaoxing said China, a permanent member of the Security Council, hopes to resolve the issue through diplomacy.

According to analyst Chintan Karnani of Insignia Consultants, gold was also being hit by rising expectations that the

Federal Reserve

will lift interest rates for longer than previously thought this year, further reducing liquidity in financial markets. Last week, the Fed boosted the overnight bank lending rate for the 14th straight meeting, to 4.50%.

Likewise, speculation that the Bank of Japan might signal it is closer to ending its zero-policy towards interest rates when it meets on Thursday added to jitters about a reduction in global liquidity.

Among the indices that track the metal-mining stocks, the

Amex Gold Bugs Index

fell 7.9%, led by declines of 8.4% in

Meridian Gold

(MDG)

and

Kinross Gold

(KGC) - Get Kinross Gold Corporation Report

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, and a 9.7% drop in

Harmony Gold

(HMY) - Get Harmony Gold Mining Co. Ltd. Report

.

The

CBOE Gold Index

was down 5.6%, and the

Philadelphia Gold and Silver Index

lost 7%.

"The movement in commodity prices is all about global liquidity," Karnani wrote in a research note.

Broad indices, meanwhile, were hit by another warning from the housing sector, as homebuilder

Toll Brothers

(TOLL)

said orders for new homes had dropped steeply in its fiscal first quarter.

The

Dow Jones Industrial Average

was losing 0.1% to 10,784.42. The

S&P 500

was down 0.4% at 1259, and the

Nasdaq Composite

was shedding 0.5% at 2247.

Aside from the matter of Iran and uncertainty about the Fed, the accelerating uptrend seen in the price of gold since mid-December seems to have stalled since last week.

As mentioned previously, a number of analysts expect gold to test $600 an ounce before pulling back. But for Erik Gebhard, president of futures and options brokerage Altavest, a correction of $40 to $50 from current levels may already be taking place.

"If you look at where we were in mid-December,

when gold was below $500, and where we were last week at $580, you see a huge move that's just not typical, even for gold," Gebhard says. "The odds are strongly in favor of a deeper correction."

Still, Gebhard, like most gold bugs, believes the bullish run is far from over. Just as a mid-December decline shook out some players and allowed for the latest surge, a pullback now is just what gold needs to push above $600 by the summer, Gebhard believes.

The latest surge has again made hedging -- gold producers' contracts to sell at a set price in the future -- unattractive, which should provide more upside for the metal in the months to come, he says.