Gold craters nearly 3% on surging dollar

By Alix Steel

Updated at 4:49 p.m. ET

Gold prices took a beating Monday, settling down almost 3%, as the metal was pummeled by a stronger U.S. dollar.

Gold (-GC) for February delivery dropped $48.60, or 2.8%, to settle at $1,668.20 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,718.60 and as low as $1,660.30 an ounce, while the spot price was down $45, according to Kitco's gold index.

Silver (-SI) fell $1.25, or almost 4%, to finish at $31 an ounce, while the U.S. dollar index was surging 1.1% at $79.51.

Credit ratings agency Moody's said that the intergovernmental changes agreed upon by 26 of the 27 European Union countries last week weren't groundbreaking and that the countries' ratings were still on the chopping block for a review in early 2012. In response, gold was tracking most all assets lower as the dollar remained the haven of choice.

"It's slightly discouraging to people who invest in gold as a 'safety' play that gold hinges directly to the euro currency," says Phil Streible, a senior commodities broker at R.J. O'Brien. Streible, among other traders, is banking on a quantitative easing program from the European Central Bank to save Europe, "and I think that gold players will be rewarded as an 'inflation' play."

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 The ECB's strong stance against buying unlimited bonds -- it has opted instead to provide unlimited three-year funding for banks -- presented a problem for gold Monday. The ECB bought only 635 million euros' worth of government bonds last week, compared with 3.662 billion euros the week before, the least since August.

If that inflation thesis doesn't pan out, investors might dump gold in disappointment. Gold is still up 18% for the year versus the S&P, which is flat, making gold an asset to sell when investors need cash or want to lock in profits.

"Waves of selling from the early morning session broke support" for gold, says George Gero, a senior vice president at RBC Capital Markets. "Stop-loss orders were accelerated," which is when traders automatically sell their positions once gold breaks below a certain price to protect any gains. The lack of momentum in gold has also sidelined traders or bargain hunters looking for that thrust higher.

A slowdown in China is also starting to worry investors. Inflation slowed to 4.2% and import growth also slowed to 22.1% in November. Streible says it's possible China might be buying less gold. "We've seen their inflation come down quite a bit . . . they are still buying a lot of products, they are just going into other things, other raw materials. They are still players, they are just not big players in the gold market right now."

The World Gold Council had estimated that Chinese gold imports could surge to 400 tons this year. Marcus Grubb, the managing director at the World Gold Council, has estimated that China could consume 747 tons of gold in 2011, more than 200 tons shy of India's 2010 consumption rate, which means China couldn't absorb a slowdown in Indian demand but could add a key support to prices. "China's rate of consumption is catching up to India's rate," Grubb said. Reportedly Hong Kong exported almost 86 tons of gold to mainland China in October, up 51% versus the previous month.

"It's normal (for gold) to consolidate after the run that we had to the $1,900 level," says David Morgan, the founder of Silver-Investor.com.​ "I think we are going to see well above those levels in 2012, but I don't think you are going to see a strong rally in the first quarter of 2012."

Mark Arbeter, a chief technical strategist at S&P Capital IQ, is forecasting a decline in the U.S. dollar but would be worried if the U.S. dollar index broke above 80. Arbeter writes that the smart money is betting against the dollar by a wide margin and is bullish on the euro. "We think gold prices could challenge their all-time highs of $1,900 an ounce and potentially challenge the big round number of $2,000 during the first half of 2012."

Gold mining stocks tumbled Monday, along with both the metal and broader equities. Barrick Gold (ABX) finished down 3.9% at $47.88 while Newmont Mining (NEM) fell 2.5% to close at $65.27. Goldcorp (GG) dropped 4.1% to $48.26, and NovaGold (NG) shed 3.2% to end the day at $10.50.