Contract gold dropped $75 an ounce, or over 4% to $1,708 between 10:30am and 11:30am on the Comex division of the New York Mercantile Exchange on Wednesday morning.
The dramatic fall came after comments from the US Federal Reserve that seemed to preclude any chance of another round of monetary easing or so-called QE3 and that its policy of zero interest rates may be coming to an end sooner than previously thought.
Earlier in the day the precious metal flirted with the 1,800/oz level, but in afternoon trade extended its losses crashing through $1,700/oz hitting a day low of $1,688/oz (a $100 intra-day trading range) and ending the day down $90 or just over 5%.
Silver followed gold's lead, giving up 7% at $34.57 after hitting a low of $33.83 earlier in the day. Wednesday's plunge reversed a recent rally in silver, which started the year below $30/oz.
The Financial Times quotes Marc Oswald, strategist at Monument Securities on Bernanke's testimony:
"There is nothing in these prepared comments which would suggest that the FOMC is even vaguely considering more QE, or even a top-up of its ‘Operation Twist', which may disappoint some of the purely "liquidity driven" and self-serving market participants."
A round of asset purchases by the US Fed to flood markets with cheap money that eventually became known as “QE2” were unveiled in 2010. Quantitative easing and other loose monetary policy measures make gold attractive as a hedge against inflation and storer of wealth.
MarketWatch reports after gaining more than $180/oz this year some profit-taking was in order:
In afternoon dealings, gold was also hit “by a large sell order on Comex, said to have been 1 million ounces (or 31 tonnes) prompted by the Bernanke testimony,” said Ross Norman, chief executive officer at London-based bullion broker Sharps Pixley.
Trading in gold futures has become more volatile recently. The last time contract gold settled above the $1,800 an ounce mark on September 20 it shortly thereafter shed more than $100 over just a few trading days.
That was not the first time traders got cold feet after breaking an important psychological level.
A similar pattern was followed in the days after gold futures hit a record high above $1,900 an ounce in August. The yellow metal fell precipitously two days after hitting the record, losing $105 or 5.6% in value in a single day.
In 2011 trading in gold was the most volatile since 1980, with the gap between the year’s highs and lows coming in at close to $600 an ounce or a 32% range. In 1980, when gold hit a record $850 an ounce, the spread was even greater at more than 40%.