Gold Prices in 'Damaging' Free Fall (Update 4)

Updated from 11:41 a.m. EDT with comments from analysts and latest market action

NEW YORK ( TheStreet) -- Gold prices were free falling as much as 4% on Friday as the yellow metal tested a key level of support of $1,500 an ounce.

Gold for June delivery at the COMEX division of the CME was falling $60.40 to $1,504.50 an ounce. The gold price traded as high as $1,564.20 and as low as $1,491.40 an ounce.

Silver prices for May delivery was plummeting $1.36 to $26.34 an ounce, while the U.S. dollar index was up 0.04% at $82.26.

Traders on Friday have tested multiple support levels for gold, and by midday analysts were uncertain as to where the yellow metal may settle.

"Certainly some key technical levels have been breached, and I think there's perhaps more momentum in the shorts at the moment than on the long side," said Will Rhind, managing director at ETF Securities U.S. "There's no single catalyst that dragged gold down."

The multiple catalysts that could be contributing to gold's monster dive include reports that Cyprus is selling its gold reserves, Goldman Sachs' research note on Wednesday that recommended to short COMEX gold and recent lowered gold price forecasts from UBS, Societe Generale and Deutsche Bank. But analysts said Friday's plunge is likely technical momentum that favors bearish traders.

Friday's percentage drop for the yellow metal was its largest since Feb. 29, 2012, when prices dropped 4.9% to $1,698.10, from the prior day's close of $1,784.80.

"When the market started to break down it shifted guys from the bull market to the bear market, so it seemed like new, maybe trend-following funds jumped on board," said Phil Streible, senior commodities broker at RJO Futures. "This pushed the market down lower, it triggered some long-only funds to liquidate and that's what you got.

Simply, liquidation pressure and funds waiting to determine a new bottom for gold prices in order to reestablish a new position.

COMEX gold prices established their first plunge around 5 a.m., and dipped to about 2% down by 8:15 a.m., before posting the most recent losses of some 4% that began around 10:30 a.m.

"That was the line in the sand $1,500 an ounce, I don't know what we'd have to do to reverse this at this point," said Tom Vitiello, partner at Aurum Options Strategies, LLC. "This is really damaging, this is damage."

Vitiello also said that volatility had exploded in options, which was causing damage there too.

Fear now is on the downside, and the handful of charges through multiple support levels was forcing investors and funds that had been in long positions in gold.

Gold prices were down about 2% during an 8:45 a.m. telephone interview with Streible, who at that time had said he needed to make calls to see if people wanted to hold onto their positions.

"A lot of it is margin calls too," Streible said then. "I have people I need to call ... and tell them you need to send more money or you're getting out right now."

A European Commission assessment emerged earlier this week that Cyprus had intended to sell about $523 million of excess gold reserves, according to Reuters.

Some analysts believe if Cyprus sells gold reserves in exchange for more capital, then other struggling nations, such as Portugal or Spain, could make similar moves in the future, Miguel Perez-Santalla of BullionVault said in an interview.

Perez-Santalla said weaker-than-expected March retail sales numbers (which dipped 0.4%) put the breaks on the huge selloff Friday morning. But it wasn't enough as gold prices doubled their losses by the late morning.

Gold ETF SPDR Gold Trust ( GLD) and iShares Gold Trust ( IAU) were off 3.6%.

NovaGold Resources ( NG) was one of the biggest gold miner decliners, as shares dipped 9.5%. Barrick Gold ( ABX) was falling 6% on high volume.

-- Written by Joe Deaux in New York.

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