Gold Prices Sink on Fiscal Cliff Fears (Update 1)

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Updated from 4:40 p.m. ET with World Gold Council report

NEW YORK ( TheStreet) -- Gold prices sank Thursday as fears about the fiscal cliff weighed on investor sentiment.

Gold for December delivery dropped $16.30 to settle at $1,713.80 an ounce at the Comex division of the New York Mercantile Exchange. The gold price traded as high as $1,727.90 and as low as $1,704.50 an ounce, while the spot price settled down $11.50, according to Kitco's gold index.

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"If it fiscal cliff brings on a recession, as opposed to inflation further on, then gold is not the hedge," said George Gero, precious metals strategist at RBC Wealth Management.

Silver prices for December delivery shed 21 cents to close at $32.67 an ounce, while the U.S. dollar index was down 0.05% to $81.08.

President Barack Obama said Wednesday in a press conference that he was willing to work with House Republicans and Senate Democrats to avoid the full effects of the fiscal cliff, which refers to the tax relief measures and spending cuts that will automatically go into effect at the beginning of 2013.

"I believe this is solvable," Obama said. "I think that fair-minded people can come to an agreement that does not cause the economy to go back into recession, that protects middle-class families."

The worry among investors has been whether the president and House Speaker John Boehner can come to an agreement on expiring tax cuts and the need for new revenue.

Boehner has said he would be open to the need for new revenue, but has refused to step back from his pledge to renew tax cats for all income earners.

This is in stark contrast to Obama, who explicitly repeated on Wednesday his campaign promise to eliminate the Bush tax cuts to the top 2% of wealthiest individuals in the country.

The concerns of a recession, though, may not be enough to thrust gold prices into a prolonged skid.

"There are enough worries to keep gold from having a big sell off, and those big worries are the Middle East -- the saber-rattling there again -- the eurozone problems and of course the other side of fiscal cliff, which means continued lower rates for quite some time," said Gero.

Reports emerged just before 12 p.m. EST on Thursday that witnesses could hear air raid sirens and explosions in Tel Aviv, Israel. But the country's chief military spokesman said two rockets launched toward Tel Aviv had missed.

Gold prices also took a hit after the World Gold Council announced that demand for the yellow metal was down in the third quarter of 2012 to 1,084.6 tonnes, from a year-ago 1,223.5 tonnes.

Demand in China fell 8%, but central bank buying is up 9% against the same time a year ago, the World Gold Council said.