After opening Thursday at $1,634.20 an ounce August gold contracts had fallen almost 3% by lunch time, crashing through the psychologically important $1,600 an ounce level to trade at $1,587.50.
After a few very quiet trading days volumes in the three month contract surged on Thursday with the yellow metal falling more than $50 an ounce in the space of a couple of hours.
Investors were reacting to Federal Reserve Chairman, Ben Bernanke's testimony to Congress which vaguely outlined that the Fed was prepared to provide further easing to boost a US economy that seems to have run out of steam and which is vulnerable to new shocks from Europe.
Although Wall Street welcomed the comments with the Dow enjoying a second day of strong gains, Bernanke's statements were clearly not enough for gold bugs who have been waiting for an indication of the resumption of quantitative easing programs which boost the attraction of gold as a safe haven. Usually bold moves by the Fed encourage investment in gold as it raises inflationary pressures on the US greenback.
CNBC spoke to Pierpoint economist Stephan Stanley who summed up the mood: "Boy, that was anti-climactic. There was absolutely nothing in terms of a policy signal…no different than what he might have said at any point over the last few years."
Bill Gross, co-CEO of the world's largest asset manager Pimco, interpreted the comments by Bernanke and vice-chair Janet Yellen on Twitter and he now sees a 60% chance of another round of quantitative easing.
Gross's bet on QE3 is huge – his holdings of US mortgage debt, the largest percentage of purchases under QE3, make up more than half his $250 billion Total Return fund.
There are those that believe the declines in bullion are only temporary – Jeff Currie, head of commodity research at Goldman Sachs, has re-iterated his forecast that gold will reach $1,840 by the end of the year. "Gold remains the currency of last resort, the case for higher gold prices remains intact,' Currie told Bloomberg yesterday.