Gold Sustains Biggest 1-Day Drop in 2 Years

So much for the gold rally.

Gold futures plunged more than 3% on Tuesday, the biggest drop in two years, as traders focused on reduced demand from Asian jewelers as bullion has soared recently.

Gold for October delivery plummeted $10.10 to $288.90 an ounce, dropping for a seventh straight session on the New York Mercantile Exchange.

It was the biggest one-day decline since Oct. 24, 1997.

“Shipments of new gold into Asia have basically come to a standstill” since prices surged to a two-year high earlier this month, said Paul Walker, director of London-based Gold Fields Mineral Services Ltd., who visited the region last week. “Manufacturers have simply stopped ordering.”

Jewelers in India, East Asia and China--who account for about 40% of world gold demand--reduced purchases after gold rocketed from $255 in August to a high of $339 an ounce Oct. 5, analysts said.

After dropping to its lowest price in two decades in July, gold rocketed after 15 European central banks agreed on Sept. 26 to limit bullion sales and lending for the next five years.

But “the spike was too fast,” said Mike Prinsloo, managing director of Durban Roodepoort Deep Ltd., South Africa’s No. 4 gold producer. “My view is that $300 to $320 is where it’s going to sit for a short while. It’s then going to consolidate at $360 and then maybe $400.”

Weaker jeweler demand has been compounded by signs of increased lending of bullion by some central banks, traders said. “There must be other central banks which have stepped into the lending market,” said Ian Prentice, gold analyst at CIBC Wood Gundy. “There is more physical gold available.”

Jewelers account for 85% of world gold purchases. Jeweler demand was already falling in the first half of the year, dropping 5.8%.

“Demand has petered out,” said Kamal Naqvi, an analyst at Macquarie Equities in London.

Still, some analysts noted that many traders have been “short” gold this year--that is, betting on a price slide. Some of those traders scrambled to buy gold when the price spiked, to close out their positions. But there may be more traders still waiting to buy gold to cover their positions.