Gold fell 5% to below USD 1,690 an ounce on Wednesday for its biggest one-day drop in more than three years, as speculation that central banks might be done with easy monetary policies led funds to exit the bullion trade.
Gold fell nearly USD 100 and silver was down USD 3 from session highs. Losses started to snowball at 10 am EST (1500 GMT) after US Federal Reserve Chairman Ben Bernanke did not mention another round of monetary easing was imminent.
Trading volume exploded when speculation about an unusually large sell-order ran rampant. Option traders said funds were heavy buyers of puts to protect against further losses.
Gold's losses dwarfed those in the euro and other commodities as bullion fell through key support after it failed to sustain gains around USD 1,790 an ounce, above Monday's high.
Market talk about erroneous trades in the US Treasury bond futures market also hit sentiment.
Most analysts viewed the sudden decline as an aberration rather than the start of a long-term decline.
"There is no hint from Bernanke's speech that there will be a QE3 type program which people have been hoping for," said Jeffrey Sherman, commodities portfolio manager of DoubleLine Capital, a Los Angeles-based investment manager with $28 billion in assets.
"It's just a pullback, it doesn't feel like it would be the start of a bear market," Sherman said.
Spot gold was down 5% for the day at USD 1,695.39 an ounce by 4:10 p.m., after hitting a one-month low at USD 1,687.99.
Wednesday's sell-off wiped out gold's gains from earlier in February, and the metal ended the month with a 2.5% loss for its second decline in three months.
Earlier in the session, bullion touched a 3-1/2 month high at USD 1,790.30 after the European Central Bank completed offering cheap loans worth over half a trillion euros to banks.
The ECB move reinforced some notions among gold investors that central banks might be finished with their monetary easing.
Spot gold fell below its 150-day moving average for the first time in a month.
Analysts said the next important resistance level is USD 1,650 an ounce, where the metal found support during its last sell-off in late January.
Funds were heavy buyers of December USD 1,500 put options as some looked to profit and others tried to protect further downside risks in futures, said Jonathan Jossen, a COMEX gold options floor trader.
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