By Jan Harvey
LONDON (Reuters) - Gold slid 2 percent on Thursday to its lowest since late June as the U.S. Federal Reserve took its first step away from the ultra-loose monetary policy that has helped drive bullion prices to record highs in recent years.
The Fed said on Wednesday that the U.S. economy was finally strong enough for it to start scaling back its massive bond-buying scheme, winding down the era of easy money that saw gold rally to $1,920.30 an ounce in 2011.
The metal was the hardest hit of the major financial benchmarks by the taper, with European stocks rebounding 1.5 percent on Thursday, the dollar index rising 0.6 percent, and bonds little changed.
Spot gold was down 1.8 percent at $1,195.90 an ounce at 1556 GMT, having earlier touched its lowest since late June at $1,193.60. U.S. gold futures for February delivery were down $39.70 an ounce at $1,195.30.
Investors snapped up bullion after the Fed's first stimulus measures were announced, as the scheme kept interest rates at record lows, cutting the opportunity cost of holding non-yielding gold, while boosting its inflation-hedge appeal.
"Gold has been working as a kind of double insurance policy all through the run up," said Sean Corrigan, chief investment strategist at Diapason Commodities Management in Switzerland. "The two sides of the insurance are insurance against over-easing monetary policy ... and financial instability or systemic risk."
Investors are seeing little argument in favour of gold at present, he said. "Inflation could come but it's not going to ... re-inspire people to have an asset that is at best not earning anything," he said.
Expectations that the Fed's stimulus programme would be unwound have knocked gold more than 25 percent this year, its biggest price drop in more than 30 years.
Following its break of $1,200 an ounce, the metal is now targeting its June low of $1,180.71 an ounce, its weakest level since mid-2010.
Its second-quarter price drop was followed by a surge in buying of physical bullion, chiefly by consumers in the world's largest gold markets, China and India. Recent price falls have not sparked the same very strong interest, however.
PHYSICAL GOLD FUNDS SOLD
Investors are continuing to sell out of gold-backed exchange-traded funds, which have seen outflows of some 800 tonnes this year. The largest gold ETF, SPDR Gold Shares, said its holdings fell another 4.2 tonnes on Wednesday.
"Heavy ETF selling has been seen all week, and it appears likely will continue into year-end, and into the 2014," MKS said in a note. "ETFs have declined in excess of 300,000 ozs gold this week alone, which also witnessed the largest single day outflow since last October."
Among other precious metals, silver was down 3 percent at $19.16 an ounce, while spot platinum was down 1.1 percent at $1,316.99 an ounce.
Palladium outperformed marginally, falling 0.3 percent to $693.67 an ounce.
The new head of Russian precious metals repository Gokhran said on Thursday the body may consider buying palladium on the market to add to its stocks.
Sales of Russian state palladium stocks have been a major factor balancing the market in the last decade, but speculation has been rife in recent years that the inventories may be depleted.
(Additional reporting by Junia Fioretti; editing by Veronica Brown, Keiron Henderson and David Evans)
