Gold extended losses on Thursday to fall as much as $200 from Tuesday's record high, as investors favoured assets seen as higher risk and after the CME Group hiked trading margins for the precious metal for a second time this month.
Investors have cashed in scorching gains in the metal ahead of a widely awaited central bankers' meeting at Jackson Hole, Wyoming, as speculation grows over whether or not the Federal Reserve will signal a further round of US monetary easing.
More quantitative easing -- or money printing -- for the Fed could significantly lift gold, but it could have further to correct if no additional action is signalled.
Spot gold was down 2.5 % at $1,707.09 an ounce at 1004 GMT, having earlier touched a low of $1,702.44.
Investors lost faith in gold's latest rally after the yellow metal surged nearly 20 % in early August to record highs at $1,911.46 an ounce.
"In a sense the decline is just subtracting the frothy increase (from the market)," said Mitsubishi analyst Matthew Turner. "That has been going on since around $1,600 an ounce, so it is hard to see where the bottom lies."
"To be convinced you'd seen the top of the market you would have to see more signs of the issues that had lifted gold being resolved, such as the euro zone crisis, and U.S. growth coming back."
Spot prices fell 4.3 % on Wednesday, their biggest one-day drop since December 2008, after US durable goods data beat expectations. U.S. gold futures also posted their sharpest slide since 1980.
Holdings of the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust , declined by more than 27 tonnes on Wednesday, their biggest one-day outflow since Jan. 25. They have dropped nearly 60 tonnes this week, worth around $3.25 billion at today's prices.
Gold's losses were exacerbated late on Wednesday after the CME Group raised margins on gold futures by about 27 %, the biggest hike in more than two and a half years and the second increase in a month.
Assets seen as cyclical or higher-risk than gold rose on Thursday as gold declined. European shares climbed after a raft of positive corporate results, oil prices firmed and the euro strengthened against the dollar.
Expectations sealed back
All eyes are now on Jackson Hole. Fed chair Bernanke's speech on Friday is being closely watched for hints of a fresh round of quantitative easing, which some have speculated could be necessary to kick-start growth.
Bernanke is likely to use his speech to acknowledge disappointment over the pace of growth, even downgrade his outlook, and explain how the Fed will tackle sluggish growth.
"It is fair to say that gold should be one of the bigger beneficiaries of another round of quantitative easing; anticipation of such has been a driver of gold's strength recently given worries about financial stability and a deteriorating economic outlook," said UBS in a note.
"That yesterday's US durable good data release surprised on the upside raised a red flag, along with equities trading again in positive territory, and climbing Treasury yields.
"As expectations of what Fed Chairman Bernanke can say at Jackson Hole tomorrow are scaled back, gold should be one of the assets that reacts most," it added. "But there is also a positive aspect to this, in that gold appears to have already discounted disappointment at Jackson Hole."
Among other precious metals, Silver was down 1.4 % at $39.10 an ounce, spot platinum was down 0.4 % at $1,794.49 an ounce, and spot palladium was flat at $743.47 an ounce.
Japanese investors have been steadily boosting their platinum investments over the last month, tempted by the precious metal's stability relative to gold as they look to diversify their commodity holdings with global markets in turmoil.