Gold Futures Tumble to $1,730, Dow Extends Gains

Gold futures tumbled late Friday morning, with the COMEX December contract dropping $19.50 to $1,732.00 per ounce.  COMEX gold futures earlier reached an intra-day low of $1,725.80 per ounce as the yellow metal built on yesterday’s losses.

Weakness in gold was fueled by a drop in investor risk aversion, evidenced by the 10.1% retreat in the CBOE Volatility Index (VIX) to 35.05.

Concurrent with the VIX’s decline, the broader equity markets posted substantial gains.  The Dow Jones Industrial Average (DJIA) surged 167.26 points, or 1.5%, to 11,310.57 as of 11:45am ET.

U.S. equity markets followed European bourses higher, as the short selling ban in various euro zone nations fueled significant gains across the Atlantic.  The euro currency advanced as well, rising 0.3% to 1.4243 against the U.S. dollar.

In addition, the sell-off in gold and rally in the Dow came despite another disappointing U.S. economic report.  The University of Michigan Consumer Sentiment Index for August came in at 54.9, far below the 61.0 consensus estimate among economists.

Moreover, the drop in consumer sentiment brought the U of M Index to its lowest level since since May 1980.

The fact that gold extended its losses following the report is not a positive sign for the yellow metal.  Coupled with yesterday’s large negative reversal – after reaching a new all-time record high of $1,817.60 per ounce – the short-term outlook for gold appears worrisome.