Gold Drops After Fed Announces Taper

Gold slid more than 1 percent on Thursday to its lowest since late June after the U.S. Federal Reserve took its first step away from the ultra-loose monetary policy that had helped drive bullion prices to record highs in recent years.

The Fed said on Wednesday that the U.S. economy was finally strong enough for it to start scaling back its massive bond-buying scheme, winding down the era of easy money that saw gold rally to $1,920.30 an ounce in 2011.

Spot gold was down 1.2 percent at $1,202.10 an ounce at 1000 GMT, having earlier touched a low of $1,200.25. U.S. gold futures for February delivery were down $32.90 an ounce at $1,202.10.

That move came despite the Fed blunting its taper with a continued dovish message on interest rates - that tapering was not tightening.

"This is another sign of increasing normalisation for the world economy," Macquarie analyst Matthew Turner said. "Gold's insurance function is less desirable in that environment."

In other markets, the dollar rallied 0.5 percent, adding to pressure on gold, which is priced in the U.S. currency and tends to move in the opposite direction to it.

European shares leapt 1.5 percent to a two-week high on Thursday, tracking gains on Wall Street and in Asia, in a broad rally after the Fed's pronouncements.

Investors snapped up bullion after the Fed's stimulus measures were first announced, as the scheme kept interest rates at record lows, cutting the opportunity cost of holding non-yielding gold, while boosting its inflation-hedge appeal.

Expectations that the programme would be unwound have knocked gold more than 25 percent this year, its biggest price drop in more than 30 years, with its confirmation yesterday pushing prices back towards June's three-year low at $1,180.71.

The precious metal could extend losses sharply if it breaks support at $1,200 an ounce, a key psychological level.

"If $1,200 gives way, then the year's lows at $1,180 will be easily achievable," Simon Weeks, head of precious metals at ScotiaMocatta, said. "It needs to happen by the end of the week, otherwise we're likely (to see) a bounce into year-end."

PHYSICAL GOLD FUNDS SOLD

Investors are continuing to sell out of gold-backed exchange-traded funds, which have seen outflows of some 800 tonnes this year. The largest gold ETF, SPDR Gold Shares, said its holdings fell another 4.2 tonnes on Wednesday.

"Heavy ETF selling has been seen all week, and it appears likely will continue into year-end, and into the 2014," MKS said in a note. "ETFs have declined in excess of 300,000 ozs gold this week alone, which also witnessed the largest single day outflow since last October."

Among other precious metals, silver was down 2.2 percent at $19.23 an ounce, while spot platinum was down 0.6 percent at $1,323.49 an ounce.

Only palladium bucked the trend to rise 0.4 to $697.72 an ounce, after five straight days of losses.

The new head of Russian precious metals repository Gokhran said on Thursday the body may consider buying palladium on the market to add to its stocks.

Sales of Russian state palladium stocks have been a major factor balancing the market in the last decade, but speculation has been rife in recent years that the inventories may be depleted.