Gold hits 2-1/2 year low as Fed flags end to easy money

By Jan Harvey

LONDON (Reuters) - Gold prices tumbled to their lowest in more than 2-1/2 years on Thursday and silver fell more than 6 percent after the U.S. Federal Reserve gave its most explicit signal yet that it plans to bring the era of easy money to an end.

Gold plunged after Fed Chairman Ben Bernanke said on Wednesday the U.S. economy was expanding strongly enough for the central bank to begin slowing the pace of its bond-buying stimulus later this year.

Its fall picked up momentum after it broke through its April low at $1,321 an ounce, a key support level, knocking it to a low of $1,285.90, down 4.5 percent and its weakest since September 2010.

Spot gold was down 3.5 percent at $1,302.90 an ounce at 1141 GMT, while U.S. gold futures for August delivery were down $71.40 an ounce at $1,302.60.

"For western investors, there's certainly less incentive to hold gold at the moment," Mitsui Precious Metals analyst David Jollie said.

"The markets have clearly decided that the withdrawal of QE is bad for gold prices," he said. "The risk of the euro zone falling apart is less, the risk from the banking system is less, and prices certainly haven't been going up for a while."

Bonds, shares and commodities fell sharply around the world on Thursday and the dollar rose after Bernanke's comments.

The ultra-loose monetary policy brought in by the Fed to boost U.S. growth, which kept interest rates at rock bottom levels while stoking concerns about inflation, was a major factor fuelling a more than decade-long bull run in gold that took prices to record highs in September 2011.

Indications that the policy was nearing an end have helped push prices down more than 20 percent this year after 12 straight years of gains.

Waning investment interest in gold has been signalled by heavy redemptions from gold-backed exchange-traded funds, whose holdings are down more than 350 tonnes so far this year.

GRAPHICS:

2013 asset returns: http://link.reuters.com/dub25t

2013 commod returns: http://link.reuters.com/reb25t

Gold/USD correlation: http://r.reuters.com/ryx52s

Gold/silver ratio: http://link.reuters.com/kuq35s

SILVER TUMBLES

Swiss bank UBS early on Thursday slashed its one-month target price for gold to $1,250 from $1,425 previously and its three-month forecast to $1,350 from $1,500, citing the Fed's move.

"This creates an increasingly difficult environment for gold," it said. "Slowing Fed asset purchases, with the end now potentially in sight, higher yields, a stronger dollar and continued improvements in the economy are significant obstacles that perpetuate an already very weak investor sentiment."

Silver was the biggest faller among the precious metals, sliding more than 6 percent to a session low at $19.68 an ounce, its weakest since September 2010. The metal was later down 5.4 percent at $20.17 an ounce.

Silver prices are now down by nearly a third this year. The gold/silver ratio, which measures the number of silver ounces needed to buy an ounce of gold, rose to its highest since August 2010 on Thursday at 64.41 as silver underperformed.

Spot platinum was down 0.8 percent at $1,398.74 an ounce, while spot palladium was down 2.8 percent at $674.47 an ounce.

(Reporting by Jan Harvey; editing by Jane Baird)