Gold price drops to 3-year low

The gold price dropped 3.5% to a more than 3-year low on Thursday, after a decision yesterday by the US Federal Reserve to make cuts to its economic stimulus program boosted the dollar.

On the Comex division of the New York Mercantile Exchange, spot gold or so-called front-month futures dropped more than $40 an ounce to $1,193.60 by the close and near its lows for the day.

That was the weakest closing level for the metal since August 2010. The three-month contract for gold fell to an intra-day low of $1,187 at the end of June .

The Fed surprised the market on Wednesday with the announcement of a scaling back of its $85 billion a month purchases under its quantitative easing program that has pumped $4 trillion of easy money into the US economy.

Monetary expansion, particularly since the financial crisis, has been a massive boon for the gold price. Gold was trading around $830 an ounce before Chairman Ben Bernanke announced Q1 in November 2008.

Gold and the US dollar usually moves in the opposite directions and gold's perceived status as a hedge against inflation is also burnished when central banks flood markets with money.

But with ultra-loose monetary policy now a step closer to ending and with inflation remaining near record lows in the US two major factors providing support for the gold price have now been removed.

There has been a steady exit from the gold market since April when a $200 drop in the price over two trading sessions shocked investor confidence in the metal.

Holdings of the world’s largest gold ETF – SPDR Gold Shares (NYSEARCA:GLD) – has dropped 30 tonnes just this month and in total more than 800 tonnes have left gold-backed funds this year.

Given the lack of inflation and with large investors abandoning the sector in droves, the metal seems destined to drift lower in the absence of a strong catalyst to drive the price higher.

The price of gold is down some 28.7% in 2013 and is set to break its 12-year bull run that took it from around $270 an ounce at the end of 2000 to a record high above $1,900 in September 2011.

Gold's $480 an ounce fall in 2013 is the worst performance since 1980, when the yellow metal hit $850 an ounce in January only to fall back $200 in a matter of days.

At $2,400 an ounce in inflation adjusted terms 1980's gold price still hold the all-time record. In that year the US inflation rate peaked at just under 15%, versus 1.2% today.

Gold price drops to 3-year low