Fear factor: Oil tumbles, gold soars

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NEW YORK (CNNMoney.com) -- Oil prices fell below $35 a barrel Tuesday, while gold prices jumped to a fresh seven-month high, amid concerns about weak demand for energy and increased safe-haven buying of hard assets.

Light, sweet crude for March delivery fell $2.58, or 6.8%, to settle at $34.93 a barrel on the New York Mercantile Exchange. Oil for April delivery, which becomes the front-month contract when March expires Friday, tumbled $3.40 to $38.58 a barrel.

"Various concerns about the economy are weighing on the energy market," said John Kilduff, energy analyst at MF Global in New York. "The unsettling mood in the economy goes right to the energy sector and concerns about demand," he said.

Demand concerns have plagued the oil market for months. The price of oil has fallen 19% this year and is down more than $110 a barrel from last year's all-time high of $147.27 a barrel.

Kilduff said the oil market is focused on the possible bankruptcy of General Motors, delays in the government's implementation of a $787 billion economic stimulus package and a "staggering" contraction in Japan's economic output.

Those concerns, however, helped drive the price of gold nearly 3% higher as investors flocked to the stability of tangible assets such as precious metals, which are considered safer investments in times of economic strife.

Gold for February delivery rallied $25.50, or 2.7%, to settle at $967 an ounce after climbing to a session high of $973.80 an ounce. It was the highest closing price since July 17, 2008, when gold settled at $970 an ounce.

"The global environment of risk aversion continues to benefit the metal, even as the U.S. dollar strengthens," said Sacha Tihanyi, market strategist at Scotia Capital in Toronto.

In addition to its reputation as a safe-haven, many investors view gold as a hedge against inflation. As a result, the metal traditionally loses value when the dollar strengthens and gains value when the currency retreats.

But the market's fear about the global economic slowdown is eclipsing concerns about inflation, and gold's reputation as a safe haven outweighed a stronger dollar Tuesday.

The euro was down 1.6% against the dollar at $1.2590 in New York trading, while the pound retreated to $1.4241. Against the yen, the dollar rose 0.7% to ¥92.37 after data showed Japan's economy shrank by the most in 35 years.

Gold's strength despite a more robust dollar "makes a revisit to $1,000 more and more likely," Tihanyi said. Gold rose to an all-time high above $1,000 an ounce last March amid severe market volatility.

Meanwhile, oil could fall to "the high 20s" if is slips below $32 a barrel this week, Kilduff said.

Automakers General Motors (GM, Fortune 500) and Chrysler LLC are required to submit turnaround plans to the government later Tuesday.

Under the terms of a $17 billion emergency loan agreement, the companies, which are teetering on the verge of bankruptcy, must show regulators how they intend to become economically viable for the long term.

Separately, President Obama signed a massive economic stimulus bill into law later Tuesday. The package is aimed at creating jobs through infrastructure spending and boosting economic activity by lowering certain taxes.