New York/London: Gold rebounded from an early dip to a six-month low on short covering on Friday, but is still on track for its largest annual loss in 32 years, as the Federal Reserve's plan to scale back its monetary stimulus and expectations of narrower U.S. government deficits have weighed on bullion.
The Fed said this week that the U.S. economy was strong enough to scale back its massive bond-buying stimulus, winding down an era of easy money that saw gold rally to an all-time high of USD 1,920.30 an ounce in 2011.
The metal, a traditional inflation hedge and safe haven, also came under heavy selling pressure after the U.S. Congress reached a two-year budget deal earlier in the week, which is set to ease automatic spending cuts and reduce the risk of a government shutdown.
"There is a real fundamental logic behind the selloff in gold, and it comes down to a real change in the way governments look at financing their activities as they are becoming more responsible," said Rob Lutts, chief investment officer of Cabot Money Management which has USD 550 million in client assets.
"People are now saying there is no need for gold as a protection as much," Lutts said.
Spot gold hit its lowest since June on Friday at USD 1,185.10 an ounce, closing in on a 3-1/2-year low reached on June 28.
The market clawed back some ground later in the session, up 1 percent at USD 1,202 by 2:53 p.m. EST (1923 GMT) on a combination of short covering and physical buying, traders said.
Option traders said there was limited buying of puts and other strategies to protect downside risk, while all eyes are on a possible sharp pullback if prices break below the June low of USD 1,180.71.
U.S. Comex gold futures for February delivery settled up USD 10.10 an ounce at USD 1,203.70, with trading volume about 30 percent below its 30-day average.
Prices are down around 3 percent this week, and some 28 percent year-to-date, set to end a 12-year consecutive run of gains.
Gold lost 2.3 percent on Thursday, making it the financial asset hardest hit by the Fed's decision to cut its stimulus. FUND MANAGERS BEARISH
Bullman Asset Management manager Nick Bullman said that gold could fall further as the Fed has only just started to taper, and investors have become very negative towards the metal because there is no sign of inflation.
"We are in an environment where we are going to need a much bigger problem in the world than we foresee for gold to recapture any of its lustre," Baring Asset Management investment manager Andrew Cole said.
As a gauge of investor sentiment, holdings in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 3.90 tonnes to 808.72 tonnes on Thursday, the lowest in nearly five years.
Outflows from the top eight gold ETFs have totalled about 720 tonnes as investors channel more money to
Among other precious metals, silver gained 0.8 percent to USD 19.39 an ounce. Platinum was up 1.1 percent to USD 1,329.75 an ounce, while palladium rose 0.2 percent to USD 695 an ounce.