Gold price falls below $1,200 an ounce

Gold bars Gold is headed for its worst quarter in decades after a sharp decline in price in recent weeks

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Gold has continued its drop, falling to its lowest level in almost three years, after the US Federal Reserve said it could wind down its stimulus programme.

Gold fell to $1,191.21 an ounce in Asia trade, after breaching the $1,200 mark in New York on Thursday for the first time since August 2010.

The US Fed said last week that its bond purchases would start to "taper off" in coming months if the economy recovers.

Analysts said investors had been anticipating further price falls.

As a result there was a sell-off, resulting in a big drop in prices in recent days.

Start Quote

Gold's major attribute as a potential hedge against a major global crisis has been diluted”

End Quote Mark Matthews Julius Baer

"You don't want to catch a falling knife, so people who might be buyers are stepping aside and don't want to show gold at their quarter-end statement," said Axel Merk, chief investment officer at Merk Funds.

Losing its lustre?

Gold prices have had a remarkable run over the past few years, driven by two key factors.

The first has been the uncertainty surrounding the global economic situation after the global financial crisis and the sovereign debt problems in the eurozone.

Analysis

Gold mining's industry body, the World Gold Council, has released new guidelines for calculating the true cost of producing the metal.

At the moment, the "cash cost" of gold only accounts for a portion of what it takes to produce an ounce of gold. Under the new "all-in" measure, not only would the day-to-day cost be included, but also capital expenditure and licensing costs.

The new method means an ounce of gold would cost almost $1,400 an ounce to produce, according to the chief executive of Gold Fields, Nick Holland. With the price of gold now below $1,200, this would make many operations unprofitable.

The move comes as South Africa's gold mining companies go into wage negotiations with their workers, who are demanding rises of between 60% and 100%.

That saw many investors turn to gold - seen as a traditional safe haven asset in times of uncertainty.

At the same time, the slowdown in the global economy, prompted central banks across the world to lower interest rates - to historic lows in many cases - in an attempt to try to boost growth.

Analysts said that with interest rates so low, investors have been favouring gold.

However, things have started to change in the past few months.

The US economy has been recovering; as a result, the Fed Chairman Ben Bernanke has said that the US central bank will scale back its $85bn a month bond buying programme.

Analysts said that such a move may see interest rates rise again - making gold a less attractive option.

At the same time, the risks surrounding the eurozone crisis seem to have abated as well, which has also hurt gold prices.

"Gold's major attribute as a potential hedge against a major global crisis has been diluted," Mark Matthews of Julius Baer told the BBC.

Mr Matthews said that given these factors the gold price may fall further.

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