After breaking below a key recent low at $1,320 an ounce, bullion's losses accelerated to their lowest level in nearly three years. The yellow metal's 5 percent decline, its biggest one-day drop since its meltdown in mid-April, is also dragging the entire commodities complex sharply lower.
After Fed chief Ben Bernanke's remarks on possible scale-back in stimulus later this year, a surge in US interest rates, as reflected in a two-year high in 10-year Treasuries bond yields, pummelled gold investments including gold exchange-traded funds. Bullion, a non-yield bearing asset and a traditional inflation hedge, tends to be particularly sensitive to interest rate changes.
"People had been going into gold, commodities and equities because the bond yields were so low. Now, with bond yield rising we are beginning to see liquidation out of gold and into cash," said Jeffrey Sica, chief investment officer at Sica Wealth which oversees over $1 billion in clients' assets. "It's going to be a bloodbath here on the way down after we broke $1,320," he said.
Spot gold was down 4.9 percent to $1,284.16 an ounce by 2:23 p.m. EDT (1823 GMT), having hit $1,281.40, which marked its lowest level since October 4, 2010. US Comex gold futures for August delivery settled down $87.80 an ounce at $1,286.20, with trading volume already surpassed 350,000 lots, on what may be its highest daily turnover in nearly a month, preliminary Reuters data. Investment demand also dropped. Bullion holdings in the world's biggest gold exchange-traded fund SPDR Gold Trust fell 0.2 percent to their lowest level in four years.