Gold crumbles in broad sell-off

By Alix Steel, TheStreet

Updated at 4:05 p.m. ET

Gold prices tumbled Thursday as investors fled into cash in the midst of a broad stock and commodity sell-off.

Gold (-GC) for December delivery settled down $54.10 at $1,720.20 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,768 and as low as $1,711 an ounce on heavy volume, while the spot price was losing $43, according to Kitco's gold index.

Silver (-SI) plummeted $2.33, or nearly 7%, to finish at $31.48 an ounce. The U.S. dollar index ticked down 0.1% to $78.28.

Fitch's warning that U.S. banks are at contagion risk if the European debt crisis gets worse, along with higher borrowing rates for Spain and France, were triggering a broad sell-off in all assets.

Gold prices accelerated losses once the price broke below $1,750 an ounce. George Gero, senior vice president at RBC Capital Markets, said sell stops could be triggered -- that is, when traders automatically dump their positions once prices fall below a preset level to protect against further losses.

 "So we continue to look for $1,725 support for gold," says Gero, "and $1,800 for resistance."

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James Moore, research analyst at FastMarket.com, says that gold is underpinned by haven demand -- some argue prices would be much lower if not for the sovereign debt crisis in Europe -- but that prices are in for a turbulent time. "The need to maintain cash liquidity and cover margin commitments will likely see the metal capped by bouts of profit taking, with gold vulnerable in the short-term should a deeper rout in equities emerge."

The fundamental case for gold hasn't changed much, but volatility has become the norm.

Total gold demand in the third quarter grew 6% to 1,053.9 tons, according to a recent report by the World Gold Council. Investment demand was the big driver, up 33%, while demand for gold bars and coins grew 29% -- and this was in the midst of gold hitting $1,923 an ounce and a dramatic 10% selloff in September.

The Eurozone debt crisis helped boost physical demand with 30% of total bar and coin demand coming from Europe, a 135% increase from last year. The biggest buyer was Germany but the highest growth rate was in France.

Inflows into ETFs also grew 58%, to 77.6 tons, despite legendary investor John Paulson liquidating a third of his position in the SPDR Gold Shares (GLD). Central bank purchases reached 148.4 tons and could reach 450 tons by year's end.

"Gold has returned as a store of value first, and a trinket second," says Adrian Ash, head of research for the BullionVault.com. "Physical metal is being monetized as coin and bar more surely and steadily than any time since the mid-1930s."

The biggest drag came from lackluster jewelry buying, down 10%. Demand in India fell off a cliff, down 26%, but the World Gold Council says that buying has recovered slightly. "We would expect Indian demand to pick up, but it depends on the currency," says Marcus Grubb, managing director at the World Gold Council.

For only the fourth quarter since 2003, jewelry demand from China outshined that of India. China represented 28% of global jewelry buying in the third quarter. Grubb says China benefitted as it let its currency be revalued upwards against the dollar versus India, which had to contend with a falling rupee -- thereby making it more expensive to buy gold.

Grubb says the third quarter is typically a slow buying period for India anyway and the fourth quarter factors in Diwali, the festival of lights, as well as a wedding season -- both giving consumers ample reasons to buy gold. "I do see (the slowdown in India) as an aberration . . . but China is continuing to gain on India in terms of consumption of gold."

India consumed 963 tons of gold in 2010, whereas China including Hong Kong consumed 607 tons, with 260 tons of that being imports. "We think imports into China could be 400 tons this year," says Grubb which means China might be on track to consume 747 tons of gold in 2011.

A hard landing in China from government efforts to cool inflation would put a big crimp in this assumption, as growth could slow to a crawl, but Grubb thinks China is playing catch up. India's gold market was deregulated 20 years ago, compared to just 10 years ago for China, which means "China's rate of consumption is catching up to India's rate."

But both countries are important to the gold market. According to the report, North America and Europe's dominance in the gold sector has almost vanished from a 44% share in 1920 to just 14% in 2010, while India and the Far East represent 66% of demand, up from 36% in 1970.

One potential negative for gold prices in the report is that mine production grew 5%, which shows that the mines that have been under construction over the past 10 years are starting to come on line. The Metals Economics Group, or MEG, says that Latin American gold production should increase more than 10% in 2011. "In addition to the advanced exploration projects that are progressing from reserves development to production, early-stage exploration by junior companies is contributing to the Latin American gold project pipeline," says MEG.

"If you look at the split of mine production over the last 10 years -- Latin America is one of the growth regions," says Grubbs. But he adds that it won't increase overall supply because older mines, especially those in Africa, are shutting down.

Grubbs says Africa used to produce 70% of the world gold supply, but now only 8%. "Latin America is taking up that slack." Production slowdowns from big miners like Agnico-Eagle (AEM) and Newmont Mining (NEM) will also offset growing production from Randgold Resources (GOLD) located in West Africa, says Grubb.

Gold supply grew only 2% in the third quarter despite the pick-up in mine production as recycling activity was up only 13% year on year, which means that despite record high prices people held on to their gold. "For investors, the price levels at which they would be happy to take profits on their holdings of gold bars and coins are being revised even higher in light of the new record gold price set during the quarter," interpreted the report.

Grubbs does say that volatility for gold prices will remain as worries over Europe continue to reverberate throughout the gold community. When sentiment is very negative "investors go into the U.S. dollar and not into gold, but eventually (gold) rallies."

Gold mining stocks fell along with the metal and broader equities Thursday. Barrick Gold (ABX) tanked 4.2% to $49.29 while Newmont Mining closed down 2.6% at $66.23. Goldcorp (GG) dropped 2.5% to $50.96 and Randgold Resources shed 3.2% to finish at $114.19.