NEW YORK ( TheStreet ) -- Gold prices sunk while silver managed to stem huge losses and rally as the U.S. dollar gained strength and investors opted for cash.

Gold for June delivery shed $13.10 to close off of session lows at $1,493.60 at the Comex division of the New York Mercantile Exchange. The gold price Wednesday has traded as high as $1,516.40 and as low as $1,482. The spot gold price was lower by $13, according to Kitco's gold index.

Silver prices settled up 21 cents to $35.01 an ounce. The U.S. dollar index was adding 0.74% to $75.75 as the euro was getting pummeled.

The euro has slid 1.7% this week as worries abounded that Greece would need more bailout money and that extending the amount of time it has to pay back loans might not be enough to get the country back to any kind of fiscal health.



According to the European Union Commission, Greece's economy is expected to shrink 2.2% in 2011 versus a prior reading of 1% but it is estimated to grow 1.1% in 2012. Greece is reportedly looking at a budget deficit of 9.5% of GDP for 2011 versus the required 7.6%, which means more tightening and perhaps more reluctance by the EU to keep pumping money into the country.

The U.S. dollar was reacting to a weaker euro, but also April's inflation reading. With the second round of quantitative easing ending in June and year-over-year total inflation at 3.2%, which is in line with expectations, the Fed will have no reason to consider QE3.

Gold's selloff, usually bought as protection against inflation, is reflecting investors' lack of long term inflation panic. The yield on the 10-year note was also lower at 3.61%, which means there was ample demand for Treasuries.

Yields rise when the government must entice investors to lend the U.S. money. Since yields are low, investors seem to be more confident lending money for a longer period of time -- another clue that inflation fears are low. Gold had rallied 9% since QE2 was announced on November 3rd.

The fact that gold was falling more strongly than silver was a rarity. Silver usually leads on the way up and down. "Gold is now viewed by many as another currency surrogate," says George Gero, senior vice president at RBC Capital Markets, "no more QE2, no QE3 means rates may go up, and dollar is stronger."

Investors seem to be participating in a broad market selloff, moving to cash ahead of the weekend.



Other experts like David Galland, managing director of Casey Research, believe there will be another quantitative easing program, just not yet.

"If they had announced they would keep rolling with QE2 .... then the dollar would have gotten crushed .... For a period of time ... the Fed will step aside ... but I think they are going to have to come back in .... sometime in the first quarter of 2012."

Galland thinks the dollar is ultimately doomed, which is good for gold and silver, but that both metals will stay volatile. "Silver around these prices $30 , I think it's a good buy, but it could still go lower ... Buy a little here ... buy a little months from now .... You want to own precious metals because of these structural issues."

Gold worries Galland, who says that it's 4.2% correction last week paled in comparison to silver's 27% selloff and that the metal might see some more downside, perhaps as much as 10%.

The same kind of caution was echoed by Jon Nadler, senior analyst at Kicto.com, at the Hard Asset Show in New York City this week. "I think the level of caution has been raised." Nadler also said investors were more interested in fundamentals and warned that "whenever you see the crowd piling in you have to be mindful of ... surprises."

Gold mining stocks were recovering from a steeper intra-day selloff. Barrick Gold ( ABX) was flat at $45.13 while Newmont Mining ( NEM) was down 0.68% to $52.90. Other gold stocks, Goldcorp ( GG) and AngloGold Ashanti ( AU) were trading at $47.91 and $43.61, respectively.

Silver stocks were losing earlier momentum. Coeur d'Alene Mines ( CDE) was down 1.52% to $25.33 while Silver Standard Resources ( SSRI) was down 0.28% to $28.42. The Global X Silver Miners ETF ( SIL) was losing 1.46% to $23.60. The silver stocks started to rally Thursday afternoon. Although metal stocks can diverge with their underlying commodity, in this case silver, it can also forecast a rally in the metal.


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-- Written by Alix Steel in New York.

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