[NEW YORK] The trickle of investors exiting gold in recent months grew into a torrent.
Gold futures slumped by the most in almost three years amid speculation that the period of easy monetary policy is ending. The European Central Bank was said to be building an informal consensus to gradually wind down bond purchases, while Federal Reserve officials talk up the increasing likelihood of an interest-rate increase in the US.
After posting the best first half in almost four decades, bullion is faltering as the prospect of higher rates and reduced stimulus curb demand for the metal as a store of value. Gold slid below US$1,300 an ounce for the first time since June in early New York trading after Fed Bank of Richmond President Jeffrey Lacker urged a rate hike to head off a pickup in inflation.
As yields on 10-year Treasuries and German bunds rose, the gold sell-off gathered steam.
"The race for the exits seems to be on," said Brad Yates, the head of trading for Dallas-based refiner Elemetal LLC. "While we may rally off the lows for a few days, we think there is a lot of backlog built up in the system that will be looking to get out."
By the time prices settled Tuesday, bullion futures for December delivery were down 3.3 per cent to US$1,269.70, the biggest loss for a most-active contract since December 2013. Aggregate trading was more than double the 30-day average, according to data compiled by Bloomberg.
Gold slipped 0.3 per cent last quarter after rising 25 per cent in the first six months of 2016. On Tuesday, the drop below US$1,300, considered a key support level for traders who study charts, triggered liquidation of bullish bets "on a major scale," Ole Hansen, head of commodity strategy at Saxo Bank A/S in Hellerup, a Copenhagen suburb, said by e-mail.
Options trading on SPDR Gold Shares, the largest exchange-traded fund backed by the metal, surged above 500,000 contracts, more than double the 20-day average, according to data compiled by Bloomberg.
The downside has further to go and prices will likely bottom at US$1,257 an ounce, said Georgette Boele, a strategist at ABN Amro Bank NV in Amsterdam and last quarter's second-most accurate gold forecaster tracked by Bloomberg.
A break below that level could mean the end of this year's uptrend in the metal, she said in a report.
"A perfect storm pummels gold," Tai Wong, the director of commodity products trading at BMO Capital Markets in New York, said in an e-mail, referring to Mr Lacker's statement, the report on ECB tapering and the key technical level giving way.
"There's increasing realisation by central banks and the market that we have reached operational as well as effective limits of easy money. That will impair gold."