Gold pellets
Gold pellets Lisi Niesner

Gold plunged Thursday after five big central banks announced a plan to inject U.S. dollars into European banks desperate for cash as a result of the continent's now-chronic sovereign debt crisis.

Over the past 20 months, interest rates on bonds of debt-burdened European countries like Greece, Portugal, Ireland, Spain and Italy have risen sharply and U.S. money market funds that typically loan to European banks have watched this growing sovereign debt crisis and have become increasingly reluctant to loan money to European banks that buy the bonds of those debt-burdened countries.

That has created a cycle of higher and higher interest rates, a falling euro, U.S. money market funds withdrawing even more from lending to European banks and, inevitably, European banks becoming desperate for cash.

Faced with the possibility that European banks might experience a Lehman Brothers-style freeze, the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank said Thursday they would team up with the European Central Bank to loan U.S. dollars to cash-starved European banks in exchange for euros.

It's obvious the ECB is working hard to get ahead of the market's skittishness about funding availability and the markets are responding accordingly as earlier losses in safe-haven assets are extending with risk assets surging, Adrian Miller, senior vice president of fixed-income strategy at Miller Tabak Roberts Securities, told The Wall Street Journal.

Some traders regarded gold's drop in price as potentially beneficial for gold investors, many of whom regard the fundamental bull-market case for gold as being unchanged by the day's central bank announcement.

It could be good for gold to make a base that would help it go higher later in the year and test the $2,000 level, said George Cocalis, senior market strategist at PFG Best in Chicago. I think $1,750 is a key number, if it can hold there then I would expect gold to move sideways and consolidate for a while under $1,800 before it moves higher.

Gold on the New York futures market closed down $45.10, or 2.5 percent, to $1,781.40. Gold for immediate delivery fell $28.46 to $1,782.91.

Silver on the New York futures market closed down $1.03 to $39.50. Silver for immediate delivery fell 82 cents to $39.56.

The dollar was down sharply against the euro and all three major U.S. stock market indexes were higher by more than 1 percent.