Gold Falls to Near Three-Year Low as Investors Bail

Source: World Gold Council

Gold took another beating on Thursday, falling close to a three-year low after Federal Reserve Chairman Ben Bernanke's comments on Wednesday that bond buying could be slowed later this year.

Investors dumped the precious metal, which traded as low as $1,289 per ounce as the dollar made hefty gains against most major currencies including the yen, with the Indian rupee hitting a fresh record low of 60 rupees against the greenback.

UBS cut its 2013 gold price forecast by 10 percent on Thursday to $1,440 from $1,600 because of Bernanke's comments.

"One of the key changes for gold investors is the confirmation that as far as the Fed is concerned the stimulus program is finite," Ric Spooner, chief market analyst for CMC Markets, told CNBC.

"The chances are that gold has further to go on the downside from here," he said, forecasting that gold will fall into the $1150-$1300 territory in the coming months.

(Read More: Gold Spared From Global Rout, for Now Anyway)

Gold has declined almost 17 percent since mid-April driven by a benign global inflationary environment, which has lessened the appeal of the metal as a hedge against rising prices.

The Fed concluded its two-day policy meeting on Wednesday and at his press conference, Bernanke set the stage for a normalization of its ultra-loose monetary policy that has supported gold in recent years.

(Read More: Taper Tipoff? Bernanke Hints Easing End Is Nearing)

Trevor Greetham, asset allocation director at Fidelity Worldwide Investment said the the strength of the US dollar despite a further drop in risk assets was the most noteworthy thing about the initial market reaction to the Fed's meeting.

"This suggests the counter-intuitive dollar weakness we have seen since Fed tapering was first raised has run its course and was mostly likely a temporary phenomenon related to the selling of dollar-linked assets in the emerging markets," he said.

Greetham plans to stay overweight the U.S. dollar and will further deepen his underweight positions in bonds and dollar-sensitive commodities including gold, which is "off hard today."

Bernanke added that Fed asset purchases could end in mid-2014, if economic data aligned with the central bank's expectations, providing more clarity to markets that have been uncertain about the timeline for tapering.

"It [Bernanke's comments] makes intentions a little clearer - and confirms that if the economy continues to grow around current levels and on the current trajectory, they are likely to begin tapering," Spooner said, noting that price action in gold, will likely be more influenced by economic data going forward.

How Low?

Sean Hyman, editor of the Ultimate Wealth Report, believes the precious metal could fall to as low as $1,000.

"When gold broke out of its sideways range from $1,520-1,800, that gave it a minimal initial target of about $1,200-1,250," Hyman said. "Those aren't minimum price targets it can go farther than that. It could be exacerbated a bit and go to $1000 before heading up."

Societe Generale on Tuesday downgraded its fourth quarter forecast for gold prices this year to $1,200 an ounce from $1,375, citing a "paradigm shift" in investor attitudes towards gold because of the dramatic selloff in April and the prospect of Fed tapering.


Andrew Su, CEO at Compass Global Markets, was less bearish on his outlook for gold and said selling in the precious metal is merely an overreaction by investors.

"If gold breaks $1,320, $1,200 is possible, but this is unlikely. There's a message [from the Fed] that stimulus has to end sometime but that's always been the case. I don't think it's going to be ended any sooner than the market has expected," Su said.

"This is an overreaction in the market," he said, adding that current weakness is a good buying opportunity for investors.

He believes the U.S. dollar will pare back some gains over the next few days, which will provide support for gold to move back above $1,400.

Owen Hegarty, vice chairman and executive director at G-Resources Group said while gold was likely to remain volatile in the short term, the investment case for gold in the longer run remains intact.

(Read More: How a Gold Fetish is Killing India's Economy)

"A strong U.S. economy, generally speaking that's good for commodities worldwide. You will see an uptick in demand and will continue to see gold rise along with that trend," Hegarty said.

By Ansuya Harjani & Jenny Cosgrave; Follow her on Twitter @jenny_cosgrave