Gold fell for a third consecutive session on Thursday, as funds liquidated positions due to CME Group's second margin hike this month, technical weakness and jitters on the eve of Federal Reserve Chairman Ben Bernanke's speech to central bankers.
Early in the session, bullion it dropped as much as 3 percent or more than $200 from Tuesday's record highs. Then it pared losses after bouncing off its 20-day moving average.
Analysts said gold was overbought after it rose as much as $400 since July on speculation that the Fed this week would announce new plans to stimulate a sluggish economy.
The psychology of the market has changed materially, and those who bought gold in the past 15 or so trading sessions are in trouble and will be sellers on rallies, said independent investor Dennis Gartman.
Spot gold was down 0.8 percent at $1,735.79 an ounce by 11:01 a.m. EDT in choppy trade, having touched a near two-week low of $1,702.44.
U.S. December gold futures were down $17.50 an ounce at $1,739.50. Trading volume was heavy for a third straight day, on pace to be one of the highest this year.
Investors have cashed in on gold's latest rally after the yellow metal surged nearly 20 percent in early August to Tuesday's record high at $1,911.46 an ounce.
Gold's decline with such a dramatic magnitude in such a short period of time is driven by short-term momentum investors coming out, not long-term investors, said Stanley Crouch, chief investment officer at Aegis Capital, who oversees $2 billion in assets.
Spot prices fell 4.3 percent on Wednesday, their biggest one-day drop since December 2008, after U.S. durable goods data beat expectations. U.S. gold futures also posted their sharpest price decline since 1980.
U.S. billionaire Warren Buffett's announcement to invest $5 billion in Bank of America also boosted equity investor confidence took some safe-haven bid away from gold.
CME HIKES MARGINS, BERNANKE EYED
Gold's losses were exacerbated late on Wednesday after the CME Group, the world's largest commodities exchange, raised margins on gold futures by about 27 percent, the biggest hike in more than 2-1/2 years and the second increase in a month.
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 January 25. They have dropped nearly 60 tonnes this week, worth around $3.25 billion at today's prices.
Investors had their eyes on Jackson Hole. Wyoming, where Bernanke was due to give a speech on Friday. Some have speculated the Fed chief will hint at a third round of government debt purchases, or quantitative easing, to bolster a sluggish economy.
More quantitative easing from the Fed could lift gold's inflation-hedge appeal. But the lack of additional action by the Fed could accelerate gold's correction.
Among platinum group metals, spot platinum was up 0.4 percent at $1,808.99 an ounce, and spot palladium rose 0.6 percent to $748.22 an ounce.
Prices at 11:01 a.m. EDT (1501 GMT)
LAST NET PCT YTD
CHG CHG CHG US gold 1739.50 -17.50 -1.0% 22.4% US silver 40.155 0.993 2.5% 29.8% US platinum 1816.10 -10.20 -0.6% 2.1% US palladium 750.75 7.60 1.0% -6.5%
Gold 1735.79 -14.76 -0.8% 22.3% Silver 40.08 0.45 1.1% 29.9% Platinum 1808.99 6.79 0.4% 2.3% Palladium 748.22 4.42 0.6% -6.4%
Gold Fix 1729.00 12.50 0.7% 22.6% Silver Fix 39.00 -308.00 -7.3% 27.3% Platinum Fix 1800.00 5.00 0.3% 4.0% Palladium Fix 746.00 2.00 0.3% -5.7%
(Editing by David Gregorio)