Spot market gold and silver prices fell to their lowest levels since September 2010 Thursday, with gold dropping through $1,300 an ounce during London trading and silver falling below $20 an ounce.
Stocks and commodities also fell and the U.S. dollar strengthened after U.S. Federal Reserve chair Ben Bernanke told a press conference that "the underlying factors are improving" in the U.S. economy, adding that the Federal Open Market Committee could begin to scale back its $85 billion-a-month asset purchases later this year, a process that has become known as 'tapering.'
"Although the Committee left the pace of purchases unchanged," Bernanke told a press conference after the FOMC's latest policy meeting Wednesday, "it has stated that it may vary the pace of purchases as economic conditions evolve... the economic outcomes that the Committee sees as most likely involve continuing gains in labor markets, supported by moderate growth that picks up over the next several quarters."
Bernanke went on to say that the FOMC expects inflation to move back up towards the Fed's 2% target "over time."
"If the incoming data are broadly consistent with this forecast," Bernanke said, "the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year... if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear."
Bernanke also reiterated that the FOMC views an unemployment rate of 6.5% as a pre-requisite before the Fed's policy interest rate should be raised, but added that it is "a threshold, not a trigger" and that the Fed may continue to target near-zero rates for some time after that level is reached.
The economic projections of individual FOMC members published yesterday show most expect 2015 to be the year when the Fed makes its first interest rate hike.
Bond market interest rates have risen in recent weeks, with investor selling pushing down bond prices and thus raising yields.
The U.S. dollar meantime rallied against other major currencies following Wednesday's Fed decision and press conference. The euro, which started yesterday trading near four-month highs against the dollar, fell 1.5% to $1.32.
"The combination of Fed tapering, a spike in nominal yields and a stronger dollar has put gold under some considerable pressure," says Ole Hansen, head of commodity strategy at Saxo Bank.
"The markets are definitely not prepared to wait until the tapering actually begins."
By late morning in London, gold was down 7% on where it started the week, with silver down 10%.
Gold prices in Euros meantime fell below €1,000 an ounce for the first time since April 2011 Thursday, as gold in Sterling fell to £833 an ounce, its lowest level since February 2011.
Bullion holdings backing the world's biggest gold exchange traded fund SPDR Gold Trust (ticker: GLD) dropped below 1,000 tonnes for the first time since February 2009 yesterday. The GLD has seen outflows equivalent to 26% of the gold it held at the start of the year.
"The lower we go, the more it will encourage ETF liquidation," says David Govett, head of precious metals at broker Marex Spectron.
"The only hope for the market at the moment is for the sort of physical demand we saw a few months ago to surface again. This usually takes a day or two to come forward as the market digests the moves, so I doubt we will see much today."
"With the negative sentiment that we have in gold currently," adds Societe Generale cross-commodity strategist Mark Keenan, we really do need to see a significant amount of physical buying in order to stabilize the market – which we are not seeing."
"I wouldn't be in a rush to say it's the end of gold," says Sydney-based Nomura analyst Amber MacKinnon.
"This is definitely a big turning point. But though we have seen some reasonable amount of stability in the U.S. economy, there is still a long way to run...early next year will be pretty telling in terms of economic data. We'll have to see how [U.S.] unemployment reacts to any scale-back in [Fed] bond purchases."
Across the Atlantic, U.K. retail sales growth for May exceeded analysts' expectations, with retail sales up 1.9% compared to a year earlier.