The price of gold plunged to the lowest level in almost three years Wednesday, as traders anticipate lower inflation risk as the Federal Reserve dials back its economic stimulus program.
Gold for August delivery dropped $45.30, or 3.6 percent, to settle at $1,229.80 an ounce, the lowest since August 2010. Silver plunged 93.9 cents, or 4.8 percent, to $18.587 an ounce.
Gold tends to do well when interest rates are low and when traders fear inflation. Traders often hold gold as an alternative store of value when they think the U.S. currency will weaken.
Those conditions were in place when the Fed’s bond-buying program was in full swing, but news last week that the program could be curtailed later this year and ended outright next year caused gold prices to fall sharply.
The dollar has been rising over the past week, after the Fed laid out its possible exit from its $85-billion-a-month bond-buying program. The Fed stressed that it would only wind down the program if the U.S. economy continued to improve.
An index measuring the dollar against six other currencies has risen 2.7 percent since the Fed announced its plans. Gold has plunged 8.9 percent since then. The dollar and the price of gold tend to move in opposite directions.
Matt Zeman, market strategist at Kingsview, a Chicago-based commodities brokerage, said gold may have further to fall. He sees gold going to $1,150 in the next few weeks. “I think we’ve got another washout to go before the selling exhausts itself,” Zeman said.
“Gold does best in a low interest-rate environment, and that is changing.”
Gold has fallen sharply this year, 27 percent, and is far below the peak of $1,900 an ounce it reached in August 2011.
Interest rates have been rising since the Fed laid out its stimulus wind-down strategy last week. The yield on the benchmark 10-year Treasury note has risen to 2.54 percent, from 2.19 percent before the Fed announced its plans last Wednesday.
Other metals futures also fell sharply.
July platinum fell $46.80, or 3.5 percent, to $1,303.70 an ounce, and September palladium fell $35.55, or 5.3 percent, to $633.25 an ounce. July copper fell 3.15 cents, or 1 percent, to $3.0410 a pound.
Crop prices were lower. The actively traded contract for wheat delivered in September fell eight cents to $6.77 a bushel. Corn for December delivery fell half a cent to $5.440 a bushel. Soybeans for November delivery edged down 2.5 cents to $12.760 a bushel.