NEW YORK ( TheStreet ) -- Gold prices tanked Tuesday, settling below the $1,400 support level as the nuclear disaster in Japan unfolded.

Gold prices shed as much as 3.5% throughout the session. Investors buy gold as risk protection to sell during times of disaster and that's exactly what global markets, most heavily the Japanese, are doing.

Gold for April delivery settled up from session lows but was still sunk $32.10 to $1,392.80 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as low as $1,380.70 while the spot gold price was plummeting more than $35, according to Kitco's gold index.



The list of bad headlines mounted Tuesday with investors trying to figure out what the worst case scenario for Japan could be. Prime Minister Kan announced that radiation levels near 4 exploding nuclear reactors are very high. Bank of Japan pumped another 8 trillion yen, or $98 billion, into the market. The Nikkei was down 14% during trading.

On the surface gold should be rising as a safe haven investment. However, it seems investors are using gold as currency, selling it for cash during this crisis.

China and India are by far the largest gold consumers in the world, and Japan saw fourth-quarter disinvestment fall 11 tons in 2010 as jewelry demand plummeted 31% in the same time frame, according to the World Gold Council.

But Japan still has gold to sell. Its central bank holds 765.2 tons. That is not to say the bank is selling but just that Japan still represents a big player in the market.

"I think Japan is unwinding a lot of carry trades," says Phil Streible, senior market strategist at Lind-Waldock. "They're selling a lot of their gold assets, their silver assets, and any other non-liquid asset, getting out of it, trying to repatriate back to Japanese yen ... cash is king right now to them."

Streible thinks that after a week, investors will have a better assessment of the damage in Japan, which might help buoy gold prices.

Gold prices also broke through a key resistance area Tuesday of $1,400 an ounce, a psychological level for most investors. The downward move triggered sell stops, where traders are forced to sell gold positions to protect gains.

The selloff brought out some bears. IBIS World reiterated its statement that gold had reached the end of its bull run. Over 2011, IBISWorld says that the price will fall 1.3% to $1,209.78, with gold ending the year at $1,150 an ounce.

IBIS does say gold prices could rally in coming weeks as safe haven demand ramps up and that its price forecast is based on political unrest not spilling over into Saudi Arabia.

Gold prices Tuesday did manage to claw their way up from session lows on bargain hunting. But investors world-wide are contending with massive losses in equities. The Dow Jones Industrial Average was tanking triple digits, which still put pressure on traders to sell gold for cash.

The SPDR Gold Shares ( GLD) lost almost 2 tons Monday.

Analysts are citing $1,380-$1,385 as the next critical support level for gold. Gold was hoping to find direction from the Federal Reserve and its interest rate decision, but found little help.

The Fed acknowledged higher inflation due to rising commodity costs, but predicted it wouldn't last long, modestly upgraded the economy, but said that unemployment still was low enough to warrant completing its $600 billion bond buying program, set to expire in June. The Fed made no mention of a possible third round of quantitative easing.

Headlines out of Bahrain could also trigger safe haven buying and bargain hunting headed into Wednesday as Saudi police are now clashing with protesters as the Bahrain ruling Sunni minority tries to control civil unrest.

Although gold prices are down more than $30, the percentage move is 2% compared with the Nikkei's 10.5% loss.

Silver prices were also in free-fall, and lost $1.72 to $34.11 an ounce. Anthony Neglia of Tower Trading says the "silver is not going away anytime soon" and is standing by his upside target of $50 mid-year. But Neglia does warn that investors need to get used to big volatile $1-$2 price swings.

Gold mining stocks, a risky but profitable way to buy gold, were getting slaughtered. Yamana Gold ( AUY) sank 3.08% at $12.14 while Harmony Gold ( HMY) was losing 1.69% to $12.19.

Other gold stocks, New Gold ( NGD) and Gold Fields ( GFI) were trading lower at $9.41 and $16.85, respectively.


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-- Written by Alix Steel in New York.

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