Gold dropped to a 10-day low Friday, losing 2 per cent as investors cashed in long positions after U.S. regulators charged investment bank Goldman Sachs Group Inc., a leading commodities player, with fraud.
A wide range of financial markets from Wall Street stocks to commodities sold off after the U.S. Securities and Exchange Commission charged Goldman Sachs with fraud over its marketing of a debt product tied to subprime mortgages.
Many in the gold market voiced concern over the SEC's allegation that Paulson & Co., a major hedge fund run by billionaire John Paulson, worked with Goldman in creating a collateralized debt obligation.
"Gold may be down because the market believes that Paulson & Co. may need to sell some of its gold position," said Joseph Arsenio, managing director of California-based Arsenio Capital Management.
Paulson, one of most notable gold investors, is the biggest owner of SPDR Gold Trust, holding 8.4 per cent of the world's biggest gold exchange traded fund. The company also owns significant stakes in a number of gold mining companies.
"The market is reacting to Goldman's extensive trading positions across all asset classes and the threat that those markets will all be disrupted as an unintended consequence of this investigation."
Spot gold was at $1,135.10 (U.S.) an ounce at 3:25 p.m. ET, down from $1,157.95 late in New York Thursday.
It was gold's biggest one-day drop since Feb. 4. The metal ended the week more than 2 per cent lower, snapping a two-week winning streak.
U.S. June gold futures settled down $23.40, or 2 per cent, at $1,136.90 an ounce on the Comex division of the New York Mercantile Exchange.
Safe-haven demand was absent in gold as the market fretted over further selling related to Goldman and the prospect of tighter financial regulations in metals and commodities, traders said.
"Goldman is one of the biggest players in commodities, so there is fear that there could be some forced liquidation of positions," said Bill O'Neill, partner of New Jersey-based Logic Advisors.
Traders said that the Goldman news prompted investors to take profits on gold's rally since it stood at about $1,040 an ounce in early February.
Wall Street stock indexes also fell as much as 2 per cent as the Goldman news sharply lowered risk appetite.
"The commodity markets have been closely correlated to rising stock markets, so any derailment of that trend was going to be slightly negative for commodities," said Robin Bhar, an analyst at Crédit Agricole.
Analysts said bullion investors were also unnerved by potential currency volatility, after China's President Hu Jintao said the country remained on course to gradually put in place a managed floating exchange rate system.
Also knocking gold, the euro slid to a one-week low below the key $1.35 level on Friday, driven by concerns about debt-laden Greece and technical momentum after stronger-than-expected U.S. housing starts data.
Among other precious metals, silver took the lead from gold, and was last at $17.68 an ounce against $18.37.
Platinum group metals also retreated after recent sharp gains. Platinum was at $1,688.50 an ounce against $1,717.50, while palladium was at $528.50 against $542.
The market will be watching a platinum/palladium report due Thursday by respected metals consultant GFMS Ltd.