Gold dropped about 3.5 per cent on Wednesday as a technical selloff, year-end fund liquidation and plunging commodities fuelled bullion's second-worst rout since the 2008 economic crisis.
Bullion's losses snowballed after it broke below its 200-day moving average – a key technical support it had held for nearly three years. Gold option volatility also exploded as investors sought to hedge against downside risk in underlying futures.
The magnitude of gold's decline dwarfed equities' losses. Bullion was already pressured by the previous session's news the U.S. Federal Reserve did not offer new economic stimulus and as European debt fears lingered.
Rampant market talk that possible liquidation by a big hedge fund to meet redemption demand ahead of the year end also weighed heavily on bullion market sentiment.
"It appears that there is significant amount of forced selling. The way gold is falling it looks like a big fund is blowing up, prompting forced-redemption selling," said James Dailey, portfolio manager of the TEAM Financial Asset Management with $200-million (U.S.) in fund assets.
Spot gold fell 3.4 per cent to $1,574.95 an ounce by 2:08 p.m. ET, having earlier hit $1,564.29, its lowest since late September.
The metal notched its worst three-day slide since late September and its second-largest sell-off since October of 2008.
HSBC said that gold was hit by a push among investors to get more cash onto their balance sheet ahead of the year end.
"Some macro hedge funds are liquidating gold holdings and taking profits in a difficult year. As trading volume typically drops toward year-end, we expect increasingly volatile price swings," said James Steel, chief technical analyst at HSBC.
In September, gold prices tumbled sharply from a record partly on speculation of hedge fund sales, which might signal a peak in bullion's decade-long rally.
At that time, there was talk hedge fund manager John Paulson might have liquidated his holdings to meet end-of-year client redemptions.
Silver tumbled 6.9 per cent to $28.63 an ounce.
U.S. gold futures for February delivery settled down $76.20 at $1,586.90 an ounce. Trading volume was almost 50 per cent above its 30-day moving average, on track to be one of the busiest sessions in the last three months.
A commodity market maelstrom also prompted investors to sell gold to cover losses elsewhere, as U.S. crude oil futures sank about 6 per cent and copper dived 5 per cent. However, S&P 500 fell only about 1 per cent.
Also weighing on gold is a market glut created by the excess supply of gold lending by European banks in return for U.S. dollars, which sent gold leases rates to their lowest levels in more than 10 years, analysts said.
Spot gold broke below its 200-day moving average for the first time since January, 2009, as some analysts said that a break below that defining parameter could spell the end of gold's three-year bull trend.
Analysts said that the next support on gold charts will be September's lows down toward or below $1,550 an ounce "Only a weekly close below $1,535-$1,555 would make us think the correction could be deeper..." said Tom Fitzpatrick, chief technical strategist of CitiFX, Citigroup's technical research unit.
In other precious metals traded, platinum was last down 3.7 per cent at $1,415.50 an ounce. Palladium dropped 4.2 per cent to $613.97 an ounce.