Market Insider

Gold tumbles as investors watch Washington dysfunction

Gazimal | The Image Bank | Getty Images

Gold futures are tumbling amid concerns about dysfunction in Washington and the government shutdown, while stocks and bonds seem to be largely ignoring it.

The dollar also fell, touching an eight-month low as buyers moved into euros and other currencies. Stocks were higher and bond prices were lower, with Treasury yields edging slightly higher.

Gold futures fell sharply after at least one major seller triggered a decline that drove the metal through key technical levels on huge volume, analysts said. The December gold futures contract was down about 2.6 percent, to $1,292 per troy ounce in late morning trading. Silver also skidded, losing more than 4 percent.

Market doesn't like uncertainty: Pro
VIDEO3:1803:18
Market doesn't like uncertainty: Pro

"We heard there was one big seller," said Howard Wen, precious metals strategist at HSBC. Wen said the selling sent early morning gold futures volume to 130,000 contracts by about 10 a.m. EDT, nearly equal to a whole day's volume.

"Around 8:40 [a.m.] when the bottom really came out of the metal, a billion dollars worth traded in the futures pit over a 10-minute period. I think a fair amount of it was stop losses when it took out the September low, and once it hit $1,300, it took out more," said Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus.

There was also market speculation about one major fund that was rebalancing as the fourth quarter begins.

"Technical chart points were hit. The second thing is clearly the shutting down of the government, and it's probably going to be another week at least that they remain out. That is always going to be viewed as deflationary, a contraction within the economy," said Dennis Gartman, publisher of the Gartman Letter.

Gold futures hit a low of $1,283 before moving back above $1,290.

"We saw support down at $1,300, but it doesn't seem to beholding," said Wen, adding that an issue is also a lack of liquidity with major buyer China out of the market because of the Golden Week holiday. The other major buyer, India, has been less active because of the weakened rupee and tariffs on gold imposed by the Indian government.

Kevin Grady, president of Phoenix Futures and Options, said there were signs of at least one very aggressive seller on the futures market open at 8:20 a.m. EDT.

"Open interest was up 5,000 contracts from Friday's trading," he said. "I just think with everything that was going on here ahead of the shutdown and because of the debt ceiling issue, some people may have come in and said 'I want to be long going into this,' and I think the longs just got trapped."

"It's really what's going on with the dollar. I think the debt ceiling issue is a lot more relevant. I think people think this [shutdown] is a short-term situation that will be dealt with," Grady said. "People don't want that for the debt ceiling. The markets do not like uncertainty."

(Read more: 800,000 out of work as government shuts down)

The U.S. government was in the process of shutting down unnecessary functions Tuesday morning after Congress failed to reach by midnight Monday on a continuing resolution to fund operations. The debt ceiling will be reached Oct. 17, and the Obama administration has said it must be raised before that. Congressional Republicans disagree, raising fears about another political impasse with the U.S. hitting the limit and heading toward default.

Lutz also said gold may be reacting to the expectation that the shutdown is a positive since it forces Congress to address the debt ceiling sooner, instead of waiting until the last minute.

"The shutdown INCREASES chances we get a debt ceiling deal—a gold negative," he said in a note.

Technical factors are also at play. MacNeil Curry, global head of technical strategy at Bank of America Merrill Lynch, said the rally in gold and silver from late June amounted to a corrective of a larger bear trend. He said a close in gold below 1,297 would complete a head and shoulders top.

"This would project a decline through the pivotal 1270 zone, exposing the 1180 bear market low," he wrote in a note. Silver also broke its two-week trendline support and could be heading for $19.70 per ounce, then possibly $17.33, he added.

Gartman noted that other commodities were also moving lower, but none with the drama of precious metals. West Texas Intermediate crude lost about $1 per barrel to $101.28, while grains slumped, in part due to a bearish USDA crop report.

"Stocks don't seem to be taking this in a sanguine manner. I think it proves the psychological nature rather than the economical nature of the gold market. … Gold gets driven by paranoia. Gold gets driven by depression.Gold gets driven by euphoria," said Gartman.

—By CNBC's Patti Domm. Follow her on Twitter @pattidomm.