Gold sinks as Italy panic wanes

By Alix Steel, TheStreet

Updated at 3:42 p.m. ET

Gold futures fell Thursday along with the U.S. dollar as panic over a financial meltdown in Italy receded.

Gold (-GC) for December delivery settled down $32 at $1,759.60 an ounce at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,776.90 and as low as $1,736.60 an ounce, while the spot price was losing a more modest $9, according to Kitco's gold index.

Silver (-SI) prices shed 25 cents to finish at $34.10 an ounce, while the U.S. dollar index was down 0.5% at $77.61.

Gold prices suffered heavy losses Thursday as inflation fears ebbed and as investors had to sell gold to raise cash after Wednesday's sell-off in the stock market.

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Italy was able to borrow 5 billion euros for one year at the incredibly high interest rate of 6.087%, but there was demand for the auction. Interest rates were also well off the 7% high for 10-year notes.

The fact that there were lenders out there for Italy eased fears that the European Central Bank would have to become the lender of last resort and print money to help save the eurozone.

Greece also named a new Prime Minister, Lucas Papademos, while Italy's Prime Minster Silvio Berlusconi was gearing up to resign. The news calmed markets somewhat and investors felt less need to buy gold as protection.

Any kind of mass panic could spur more liquidation in gold and trigger euro selling, which would prop up the dollar and further hurt gold -- the dollar index was already clawing back from session lows. On the flip side, if investors need safety they may look to gold.

Global selling pressure was also weighing on the metal. "Gold yesterday set a new all-time high in Indian Rupee terms and hit its highest in euros and sterling in over a month," said James Moore, a research analyst at FastMarkets.com. "Short term, the complex is likely to remain under pressure . . . (but) the metal will benefit from further flight-to-safety demand."

The majority of selling was coming from the futures market, with the spot price, representing physical demand, holding up better and with tonnage in the popular gold ETF SPDR Gold Shares (GLD) actually growing. The ETF has added more than 20 tons this week. "Given the ongoing high uncertainties and the current risk aversion, gold should remain well supported despite the latest price slump," Commerzbank said.

Gold mining stocks were mixed Thursday despite a strong snapback rally in broader equities. Barrick Gold (ABX) was up slightly to $51.17, while Newmont Mining (NEM) lost 0.5% at $68.92. Goldcorp (GG) was down 0.6% to $51.45, and Randgold Resources (GOLD) was falling 1.3% to $115.