Gold dives to lowest since July on Fed, hedge fund talk

By Frank Tang

NEW YORK (Reuters) - Gold tumbled 2.5 percent on Wednesday to its lowest price since July after minutes of the Federal Reserve's meeting last month showed the U.S. central bank may have to slow or stop buying assets before a pick-up in the job market.

Silver and platinum group metals also dropped sharply.

Before the Fed released its minutes, bullion was already down sharply as rumors swirled that a large commodity hedge fund had been forced to liquidate its holdings, which triggered a broad sell-off in industrial commodities led by crude oil.

Selling accelerated after bullion slipped below two key resistances at $1,600 and $1,575 an ounce. It completed a bearish technical formation known as a "death cross", when its 50-day moving average broke below its 200-day moving average.

"It's clear the funds are not coming in to support the market, and I don't see any physical interest either. There has been a clear rotation out of gold and other commodities into equities," said Bill O'Neill, partner of commodities investment firm LOGIC Advisors.

Spot gold was down 2.5 percent to $1,564.05 an ounce by 4:17 p.m. EST (2117 GMT), having hit $1,558.24, its lowest since July 12.

U.S. gold futures for April delivery settled down $26.20 at $1,578 an ounce, with trading volume about 50 percent above its 250-day average, preliminary Reuters data showed.

The Federal Open Market Committee minutes said current U.S. economic conditions might lead the policy-setting committee "to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred" .

The Fed voted last month to maintain its third round of quantitative easing, known as QE3, at an $85 billion monthly pace. It said it would buy bonds until it saw a substantial improvement in the outlook for the labor market, which remains under pressure with the jobless rate at 7.9 percent.

"People are taking a step back and asking themselves 'Is the Fed going to stop quantitative easing earlier?'" said Axel Merk, chief investment officer of Merk Funds which manages $630 million in mutual fund assets.

Minutes from the December meeting also showed some policymakers had been mulling a lessening or complete withdrawal of Fed stimulus.

ECONOMIC OUTLOOK IN FOCUS

Gold has been seesawing between hopes of central-bank easing which boosted its inflation-hedge appeal, and expected economic improvement which dent its safe-haven status, said Jeffrey Sherman, commodities portfolio manager of DoubleLine Capital, which manages more than $53 billion in assets.

"I do not think the Fed will stop asset purchases in the calendar year," Sherman said.

Other money managers cited gold's pullback to anticipation of a sharp move into equities and longer-yield Treasuries because of a better global economic outlook.

U.S. equities fell on the Fed minutes on Wednesday, but the benchmark S&P 500 index remained near its all-time high.

Silver fell 3.1 percent to $28.52 an ounce, platinum dropped 2.6 percent to $1,644.25, and palladium was down 3.3 percent at $735.97 an ounce.

(Editing by Chizu Nomiyama and David Gregorio)