"Gold prices might already be trading at oversold levels," wrote Tobias Merath, head of commodity research at Credit Suisse, in a note released Thursday. "Fundamentals still speak in favor of a recovery to $900 or slightly higher in the next few months."

Gold for December delivery fell $17, or 2.2%, to close at $745.50 an ounce on the Comex division of the New York Mercantile Exchange Thursday, the first time the metal closed below $750 since last October. After market closed, it moved higher in electronic trading. See Metals Stocks.

Gold hasn't recorded a single upward session this month and it has fallen more than $90 in the nine trading days since Aug. 28. In the previous month, the precious metal lost $89.20, the biggest monthly loss since at least 1984. The precious metal is now more than $250 lower than its record high above $1,000 hit in March.

"An important low is at hand and while some base building will be needed, we'll be above $800 again" before the end of the year, said Peter Grandich, editor of the Grandich Letter.

Investor demand for physical gold is still strong, said Jeffrey Christian, managing direct of commodities consultancy CPM Group. Demand in markets such as Mumbai and Dubai have held up well.

"Investors in physical metal appear to be taking the drop in prices as an opportunity to buy more metal at lower prices," he said.

On the gold ETF side, there has been only marginal liquidation of gold ETF holdings -- about 1 million ounces over the past five weeks, according to Christian's calculations.

In comparison, open interest on the Comex, or total futures contract outstanding, has dropped 63,684 contracts in the same period, or about 6.4 million ounces, according to data from the Commodities Futures Trading Commission.

Dollar pushes down commodities

Gold is moving broadly in line with other commodities and broadly in an inverse pattern with the dollar, Christian said.

Gold isn't the only commodity that has suffered losses as the dollar rallied. Crude has dropped almost $50 from its record high and closed near the $100-a-barrel psychological level Thursday. Corn was trading at the lowest in more than one month.

In the currencies market, the euro Thursday broke through its psychologically important level of $1.40. The dollar is also trading near its strongest level against the British pound in more than two years. See Currencies.

Historically, dollar-denominated gold prices tend to move in the opposite direction of the greenback. A stronger greenback tends to push down gold prices as it makes gold less appealing as an alternative investment.

"We are experiencing a massive hedge fund panic into the dollar, and that hurts gold," said Ned Schmidt, editor of the Value View Gold Report.

But a further sharp appreciation of the dollar is unlikely given the problems in the U.S. financial system, said Credit Suisse's Merath.

The U.S. financial industry witnessed the most dramatic change in decades when the Treasury Department announced over the weekend that the government will take over Fannie Mae and Freddie Mac, the home mortgage loan giants. Shares of the two firms plunged to below $1 after the announcement. See full story.

The government's move is bearish to gold in the short term but bullish in the long term, said Ed Bugos, editor of Gold & Options Trader, a newsletter published by Agora Financial.

"In the short term it reduces the dollar's risk premium and boosts the debt markets," said Bugos. "In the long term, it confirms the arguments gold bugs have been making about a government that creates crises through intervention then adds more regulation and intervention in the next crisis."

However, gold could still fall further in the short term, some analysts said.

"There is still a realistic chance of having gold prices try for the $640-$680 range in the not so distant future," said Jon Nadler, senior analyst at Kitco Bullion Dealers. "There remains a huge amount of damage that needs repair before confidence returns."