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Gold Falls to 3-Month Low as 'Hot Money' Heads for Exit

Gold prices fell to a 3-month low Tuesday and are down 6 percent this year, as the precious metal has plunged $50 in just the past 5 sessions.

Gold bars
Tom Grill | Iconica | Getty Images
Gold bars

A short-covering rally from intraday lows helped gold finish the regular session right above a key support level at $1,332 an ounce, but many analysts see reasons for gold prices to continue to fall.

U.S. traders awoke to an interest rate hike from the Reserve Bank of India that will likely reduce physical demand for precious metal from Indian consumers and send investment away from the Indian equity market. In China, the Shanghai Interbank Offered Rate has been increasing steadily, adding to hikes in other rates there and concern that the engine of commodity growth is slowing down.

As traders anticipate a pro-growth message from President Obama in tonight's State of the Union address, prices could continue to fall in the electronic session later Tuesday.

The conclusion of the two-day Federal Open Market Committee Wednesday may offer a reprieve from the selling, however. "A rebound could take place later in the week if the FOMC statement appears to suggest unity behind maintaining quantitative ease and the market maintains support at $1317," says MF Global precious analyst Tom Pawlicki.

Still, a sentiment shift seems set for now. Open interest in the gold futures market continues to decline—81,000 contracts left the market on Monday—and holders of exchange-traded funds are heading for the exits. This week started with largest gold ETF posting its biggest one-day plunge since October.

But this change in sentiment didn't just happen today. For the past few weeks, the talk on proprietary trading desks and in the commodities trading pits at the New York Mercantile Exchange has been about for major hedge funds unwinding positions in gold and other commodities. That talk has been substantiated by actual trade data from the CFTC showing speculators' long positions in gold declining for the past three weeks, now at the lowest level since mid-2009.

Still many see this "consolidation" in gold as a necessary breather in the precious metal's long-term bull run. Trader Jordan Roy-Byrne saying the precious metal is in an "enviable position." While in a corrective mode, gold has only declined marginally "while shedding the speculative 'hot' money that in fact, continues to reside in other markets."

Meanwhile, a Reuters poll released today shows the consensus among Wall Street analysts is for gold prices to average $1,450 an ounce this year.