Gold traded below $1,200 a troy ounce for the time since June as the US Federal Reserve took the first baby steps away from a historic era of monetary stimulus.

Bullion fell as much as 2 per cent to $1,193.60 in the wake of the Fed’s decision to pare back its asset purchases by $10bn a month, starting in January.

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Ultra-loose monetary policy helped drive bullion prices to record highs in recent years. The precious metal gained more than 125 per cent between 2009 and its peak of $1,920, reached in 2011.

But on Wednesday, the Fed said the US economy was finally strong enough for it to start scaling back its massive bond buying programme.

Expectations of an end to the US monetary stimulus programme has knocked more than 25 per cent off the gold price this year, its biggest drop in 30 years. Most of the selling has come from western investors in gold exchange traded funds (ETFs), which have seen more than 800 tonnes of outflows this year.

Given that weakness, many analysts were surprised by the size of Thursday’s retreat, particularly as the Fed said interest rates were likely to stay close to zero “well past the time” the US jobless rate declines below 6.5 per cent. Low interest rates are important because they reduce the opportunity cost of holding gold, a non-yielding asset.

“I was not expecting gold to do very much [after the Fed announcement]. Every time that [Fed Chariman Ben] Bernanke has sneezed this year the [gold] market has caught a cold,” said Rhona O’Connell, head of metals research and forecasts at Thomson Reuters GFMS. “I thought the market was desensitised.”

HSBC analyst James Steel said the decline seemed “out of step” with the actual taper announcement. “But the US dollar has rallied and I suspect that is weighing on the gold price.”

Mr Steel said he would not be surprised if the gold market recovered some of its lost ground once the market had fully digested the Fed statement and the Christmas holiday period was out of the way.

“These are very attractive levels for price sensitive buyers,” he said. “At the retail level, in places like China, this pull back will be greeted pretty bullishly.”

However, traders said if the price remained below $1,200 for an extended period it could trigger a renewed wave of selling by western investors.

Elsewhere, silver, which usually moves in lockstep with gold, fell 2.7 per cent to $19.19. However, there were more resilient performances from other precious metals. Platinum, for example, was down 1 per cent at $1,317 a troy ounce, while palladium was off 0.3 per cent at $693.

“Sometimes that’s a sign the market is getting oversold,” said Mr Steel. One would have expected palladium to be down $18 or so with a drop in gold like this. But it isn’t.”

Source: FT