Gold prices plunged Thursday when investors stampeded out of precious metals, as well as stocks, into the perceived safety of the U.S. dollar.

The greenback, which competes with gold as a safe-haven investment, soared to a seven-month high and the interest rate on the benchmark 10-year Treasury note dropped to 1.752 percent, a low not seen in 60 years. Interest rates on bonds move in the opposite direction of bond prices.

The run on the dollar started Wednesday when the Federal Reserve said there are significant downside risks to the economic outlook, including strains in global financial markets.  

That statement signaled the central bank was capitulating to a months of bad news.

When the Fed tells you, after a six-month period during which the economy basically stagnated, that the 'downside risks' from here are 'significant,' you know that even the ardent optimists at the central bank are throwing in the towel, analyst David Rosenberg of Gluskin Sheff + Associates Inc. told clients in a note.

The global flight into U.S. Treasuries and the dollar was also spurred by weak economic data from China, which has now recorded its third straight month of manufacturing contraction, and Germany, where purchasing managers see declining business activity.

Here we are, likely facing yet another recession, lacking in confidence, with limited jobs opportunity, hanging our star on a president and Congress that can't agree on what day it is, while offering very little hope of anything meaningful in terms of a jobs solution or a fix for the housing market, Kevin Giddis, managing director of fixed income at Morgan Keegan in Memphis, told Reuters.

The dollar may remain the world's preferred safe haven for months, meaning a rebound in precious metals could take weeks, if not months.

The crucial hurdle for gold now is U.S. dollar strength. Indeed, our foreign exchange strategists remain bullish on the dollar over the medium term, Edel Tully, strategist for UBS, said in a note. Should the dollar rally as expected, this would considerably hamper gold's upside potential.

Gold on the New York futures exchange fell $66.40 to $1,741.70, a 3.3 percent decline and a five-week low. At one point during the trading session gold had fallen 4.3 percent.

Gold for immediate delivery was trading at $1,738.73.

Silver, which at one point had dropped 10 percent on the New York futures exchange, settled down $3.89 to $36.58, a 9.6 percent decline. At one point silver was off 10 percent.

Silver for immediate delivery fell $1.68 to $36.41.