Gold prices notched their biggest decline in nearly three years, as a stronger dollar and signals that the Federal Reserve might be closer to raising interest rates this year drove investors out of the precious metal.
Gold for October delivery closed down 3.3% at $1,266.30 a troy ounce, the metal's biggest loss since Dec. 19, 2013. It was the lowest settlement price for gold since June 23. Prices for silver, which tends to be more volatile then gold, were down 5.7% to $17.71 a troy ounce for the October contracts, the biggest drop since January 2015.
Traders have piled into both precious metals this year, encouraged by a stable dollar and a Fed that has been more averse to raising interest rates than many investors initially expected. Recent signs that the U.S. economy may be strong enough to for the central bank to raise rates before the end of the year have prompted some investors to take profits. Gold prices are up nearly 19.4% this year, while silver has risen 28.6%.
"The market is coming to terms with what may be a new burst of dollar strength and a U.S. economy that is strong enough to bear an interest-rate increase," said Ira Epstein, a strategist at the Linn Group. "This is where you step away from gold."
A drop in the British pound to a multidecade low helped boost the dollar. The Wall Street Journal Dollar Index, which measures the U.S. currency against a basket of 16 others, was recently up 0.6% at 87.06. A strong dollar tends to weigh on gold, which is priced in the U.S. currency and becomes more expensive to overseas buyers when the dollar appreciates.
The U.S. currency was also firmer following a rebound in U.S. manufacturing data published Monday and on comments from Federal Reserve Bank of Cleveland President Loretta Mester, who reiterated her call for higher U.S. interest rates.
Fed-funds futures, used to bet on central-bank policy, showed Tuesday that investors assigned a 63% likelihood to a rate increase in December, up from 61.6% the previous day, according to CME data. Expectations of higher rates often pressure gold, as the metal struggles to compete with yield-bearing investments like Treasurys when borrowing costs rise.
Options trading of gold ETFs soared on Tuesday. Volume of puts -- or contracts that give the right to sell -- on the SPDR Gold Trust was triple the one-month average, according to options data provider Trade Alert. The ETF tracks the price of the precious metal.
"People are throwing in the towel" after diving into bullish options, or calls, yesterday, said Fred Ruffy, an analyst at Trade Alert.
Investors are also looking ahead to September nonfarm payrolls figures from the U.S. on Friday. A strong number could bolster the case for a rate increase in December and dent gold further, analysts said.
"I think any strength of the U.S. economy is going to be negative for gold," said John Davies, a global industry strategist at BMI Research.
Not everyone is convinced that gold is headed lower. Peter Hug, global director of trading at Kitco Metals, said many of the factors that drove gold higher this year, including negative interest rates in Europe and Japan, will likely remain in place. At the same time, it is too early to tell whether the U.S. economy will stay strong through December, he said.
"At these levels, I'm buying," Mr. Hug said.
--Inyoung Hwang and Katherine Dunn contributed to this article.
Write to Ira Iosebashvili at firstname.lastname@example.org