Gold's meltdown continues

By Alix Steel, TheStreet

Updated at 2:55 p.m. ET

Gold prices extended their meltdown Monday after plummeting 10% in a week.

Gold for December delivery fell $45 on heavy volume to settle at $1,594.80 an ounce on the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,666.30 and as low as $1,535 an ounce. The spot price of gold was down $47, according to Kitco.

Silver prices settled down 13 cents to $29.98 an ounce, while the U.S. dollar index was down 0.1% at $78.44.

The Chicago Mercantile Exchange raised by 21% the amount of money traders must pay up front to trade a 100-ounce gold futures contract. It will now cost $9,450 to buy an initial gold contract and $11,475 to maintain it. The exchange raised margins by 15.6% for silver.

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The news hit after gold fell 10% in a week as investors rushed into cash with the U.S. dollar shining as the haven asset of choice. Speculative long positions plummeted by more than 22,000 contracts in the week ending Sept. 20. Short contracts -- bets against the metal -- also fell by 4,000 contracts, signaling traders were exiting all trades in the gold market.

Monday also kicks off the last week of the third quarter and options expire Tuesday, so fund managers and traders will be furiously rebalancing their portfolios. Gold prices had rallied 34% this year, prompting many investors to dump gold for profits, as it has been one of the best-performing assets of the year.

The U.S. dollar index is also staging a solid rally, which would be a negative for stocks and all commodities, said Mark Arbeter, the chief technical strategist at Standard & Poor's. "We think gold prices are breaking down," Arbeter wrote in a recent note. "There is little chart support until prices reach the $1,460- to $1,560-an-ounce region."

In overnight trading, gold prices tested the 200-day moving average around the $1,525-$1,535 area, a popular technical level zeroed in on by chart watchers, but then rallied from that overnight low.

"I have a funny feeling we are going to rally off of these numbers," said Anthony Neglia, the president of Tower Trading. Neglia doesn't think Monday's selling is a reaction to margin requirements but more due to options expirations Tuesday, when traders must decide whether to exercise an option (either buy or sell gold), convert it into a full-blown futures contract or let the contract expire worthless. The result is a lot more activity and volatility in the market.

"After expiration, we challenge $1,700," said Neglia, adding, "This price action is here to stay -- 5%-10% moves for quite a long time." Neglia said if gold prices hold $1,580, he might be tempted to buy a long position but that if not the next stop is $1,480 and then $1,300 an ounce.

David Banister, the chief investment strategist at TheMarketTrendForeca​st.com, is buying gold on the meltdown.

"I expect a major QE3 to come around the corner and push stock markets much higher," he said. More money in the system from the Federal Reserve would be good for gold as the move would devalue the dollar, put inflation worries back on the table and make gold an attractive hedge. "But it will take some time to exceed the $1,920 highs, possibly several more months," Banister added.

Fundamentally, nothing has really changed for gold. There is no solution to Europe's debt crisis -- in fact, the European Financial Stability Fund might actually double its cash on hand, and the U.S. is looking at another government shutdown come Oct. 1.

China also launched its first gold vending machine in Beijing, according to reports. Gold-hungry consumers can buy as much as $157,000 worth of gold. China is battling India for the title of world's top gold consumer. According to the World Gold Council's second-quarter gold demand report, the two markets accounted for 52% of global bar and coin investment and 55% of global jewelry demand. Year-on-year volume growth in total consumer demand was 25% in China.

"I have talked to a lot of the coin dealers," said Phil Streible, a senior market strategist at MFGlobal. "Over the weekend there was a massive spark of buying on the physical side. I expect to see that come over to the futures side."

In the middle of last week's carnage in the gold market, the SPDR Gold Shares (GLD) didn't shed any tons of the metal, as longer-term investors decided to hold on to their shares.

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Gold mining stocks were mixed Monday despite a triple-digit rally in the Dow Jones Industrial Average ($INDU). Barrick Gold (ABX) was rallying 0.7% to $46.74, and Newmont Mining (NEM) was gaining 1.8% at $63.97. Meanwhile, AngloGold Ashanti (AU) was sliding 0.3% to $43.10, and Goldcorp (GG) was falling 0.6% to $45.36.