Gold Prices | 12-Day Low

Gold Prices

Gold prices plunged to a 12-day low, after a 2 percent drop in oil prices and 1 percent decline in U.S. equity indexes, as investors took profits when a weak U.S. confidence reading implied consumer demand would languish for some time to come, and that will definitely be true.

Other precious metals, which rose to multi-week highs in early trading, changing direction to also suffer steep losses when investors decided to sell a bunch of commodities it the midst declining confidence.

Spot gold dropped to a low of $934.70 an ounce, its lowest since July 17, to change hands in late New York trade a bit higher at $936.95 an ounce, down from $953.25 an ounce in late Monday business.

New York August gold futures tumbled $14.40, or 1.51 percent, to $939.10 an ounce on the COMEX division of the New York Mercantile Exchange.

August gold's average plummeted to a low at $933.80 - last experienced on July 17 - from a day's high at $956.80.

Along with lower oil and share prices, gold added to losses when the U.S. dollar increased from its lowest level of the year against a currency basket. The dollar rebounded as sinking confidence rekindled worries about the U.S. economic recovery and increased demand for safe-haven assets.

Gold, like other dollar-priced commodities, becomes less expensive for holders of other currencies as the U.S. unit weakens.

"We ran into profit taking. We had a technical failure at the $956 level. A little bit of dollar strength, a little bit of stock market weakness, a little bit of crude weakness cascaded into the tight trailing stops," said Frank McGhee, head precious metals trader at Integrated Brokerage Services LLC in Chicago.

McGhee said there were a number of factors driving the price down, including a series of automatic sell orders bunched up between $942 to $958 an ounce that lead to accelerated selling in the New York afternoon session.

Crude prices fell 2 percent, causing interest in gold to decline as a hedge against oil-led inflation.

Gold Prices

An Ounce of Gold Buys Most Barrels of Oil Since January 2007

While gold has partaken in the fall of commodities, it has held better than most during the worldwide credit crisis. Even so, it has dropped by 16 percent since October when large funds started to deleverage their positions.

One of the measures used to measure the purchasing power of gold is how many barrels of oil it can buy. As of Friday, it bought 12 barrels of oil per ounce of gold, the strongest performance since January 2007.

When oil reached close to $150 a barrel in July, the ratio of gold-to-oil dropped to 6.6. Over the long haul the average ratio comes in at close to 15.

The normal historic behavior of gold in relationship to oil is rise in price along with it, usually performing as an inflation hedge.

With consumer demand falling and companies cutting back on purchases, gold has also risen against metals like copper and nickel. The gold-to-nickel ratio is another indicator used to measure economic performance, and last month Deutsche Bank asserted it could fall into single digits if economic conditions continue to worsen.

As tight credit markets ease, we should see gold return to its usual use as an inflation hedge and flight to safety. So far inflation has been somewhat contained, but the inevitable printing of more money to fund all the billions in bailouts will put upward pressure on prices of goods and services.

In the short term safety will be the key issue driving gold prices as more liguidity enters the markets. Liquidity is the key driver now, not safety.

So far this year gold has fallen by 12 percent, while crude oil has plunged 36 percent.