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Gold sinks to 3-year low; ends at $1,193.60

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Gold closed more than 3 percent lower on Thursday at its lowest closing price since August 2010 as the Federal Reserve took its first step away from the ultra-loose monetary policy that has 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.

The metal was the hardest hit of the major financial benchmarks by the taper, with European stocks rebounding 1.5 percent on Thursday, the dollar index rising 0.6 percent, and bonds little changed.

Spot gold was last down 1.8 percent to $1,196 an ounce, having earlier touched its lowest since late June, at $1,192.30. U.S. gold futures for February delivery settled 3.4 percent lower at $1,193.60, its lowest settlement prices since Aug. 3, 2010.

"A lot of gold investors are anticipating deflation not inflation as a result of the Fed announcement, taking advantage of the downside momentum and shorting gold at least temporarily,'' said Jeffrey Sica, chief investment officer of New Jersey-based Sica Wealth, which has more than $1 billion in client assets.

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Gold extended its decline to a third consecutive day and was the hardest hit of the major financial benchmarks by the taper. The S&P 500 equities index eased after ending at a record high on Wednesday, while the dollar index rose sharply for a second day.

"Gold has been working as a kind of double insurance policy all through the run up,'' said Sean Corrigan, chief investment strategist at Diapason Commodities Management in Switzerland. "The two sides of the insurance are insurance against over-easing monetary policy ... and financial instability or systemic risk.''

Investors are seeing little argument in favor of gold at present, he said. "Inflation could come, but it's not going to ... re-inspire people to have an asset that is at best not earning anything,'' he said.

Expectations that the Fed's stimulus program would be unwound have knocked gold more than 25 percent this year, its biggest price drop in more than 30 years.

Following its break of $1,200 an ounce, the metal is now targeting its June low of $1,180.71 an ounce, its weakest level since mid-2010.

—By CNBC with Reuters

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