Gold prices plunged Wednesday as speculators headed for the exit door after troubling news out of the oil patch.

Benchmark contracts for gold bullion settled down $20.60 at $882 an ounce in frenetic action on the Comex division of the New York Mercantile Exchange. Earlier in the session the prices slid to $875, a decline of over 3%, before retracing the drop somewhat.

The slide started after the Energy Department reported a much higher-than-expected jump in crude oil inventories.

"What it really points to is how fast the U.S. economy is slowing down and that the stock market is overvalued," says Andy Montano, director of precious metals at Toronto-based bullion bank ScotiaMocatta.

Many gold investors see bullion holdings as a form of investment life-insurance, to be cashed in to cover losses on more traditional assets such as stocks or bonds. "People are using gold for its traditional use and cashing in their chips," Montano adds.

The volume of action in both the spot market and on the futures exchanges was said to be heavy. But traders also report that the electronic trading platforms were seeing order imbalances, possibly as a result of too many sell orders flooding the system at certain points.

The bullion exchange-traded funds, which hold inventories of the metal in underground vaults, were lower also, with streetTracks Gold Shares ( GLD) and iShares Comex Gold Trust ( IAU) down around 0.6% and 0.8%, respectively.

The rout in the metal hit stocks hard. Shares of Goldcorp ( GG) were off 4%, while those of Harmony Gold Mining ( HMY) were thrashed, down 8.1%.

Yamana Gold ( AUY) was losing more than 5% in recent action.

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