The Fed signaled last week that it may begin to wind down its $85 billion-a-month bond-buying program, or QE, before the end of the year. Gold has fallen sharply, while Treasury yields and the dollar moved higher. The gold futures contract for August delivery fell $45 to $1,229 an ounce. Silver was also sharply lower, down 4.5 percent.
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Kevin Grady, president of Phoenix Futures and Options, said there was a lot of selling out of Shanghai on Tuesday night, possibly a side effect of the China credit crunch. But there was also some physical buying from China and the Middle East.
"There's a strong correlation between gold prices and emerging markets' financial assets," said Steel. "As the Fed came out with its policy statement, and with the slowdown in China, emerging market assets have weakened, and that tends to be a negative for gold prices."
Credit Suisse analysts this week set a gold target of $1,150 over the next 12 months.
"On the technical side, it is clear that after steadily moving higher for 10 years, the upward trend has decisively broken over recent months, shattering the confidence of those who thought gold would continue to chart new highs indefinitely," the analysts wrote.
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"The second key reason cited by many to hold gold over the past five years has been the near religious faith among bulls that QE must relatively quickly lead to a substantial increase in inflation, with many fearing hyperinflation. In reality, five years after the Fed commenced its program of quantitative easing—and 12 years after Japan began 'printing money'—global inflation continues to fall, with core US PCE deflator inflation falling to the lowest level seen since the series was first calculated in the 1960s," they said.
The selling in gold also raises questions about the prospects for mining companies.
"We are falling below the top end of marginal costs for production, so there is debate in the market about what the production response is going to be," Steel said, adding that average production costs can be $700 to $900 an ounce. But the marginal costs, exploration and sustainability, push the costs above $1,100 for some.
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Credit Suisse equity analysts downgraded Barrick Gold to neutral from outperform Wednesday, cutting their target to $20 from $36. Barrick fell 7 percent and was trading below $15, a near 60 percent decline this year. On Monday, Barrick said it was cutting a third of its Toronto corporate staff. Credit Suisse analysts said Barrick was downgraded for a number of reasons, including gold price uncertainty, debt and potential write-downs.