Gold drops by more than five per cent as equities spring back

 
Julian Harris
Follow Julian
GOLD plummeted by over five per cent yesterday -- its sharpest decline in nearly three years -- as some investors cashed in on its recent surge and switched to equities ahead of Federal Reserve chief Ben Bernanke’s hotly-anticipated speech at Jackson Hole.

The precious metal – which soared to over $1,900 an ounce earlier in the week – sank as low as $1,756. The CME Group exchange hiked gold margins by 27 per cent last night, effective from the close of play this evening.

European stocks closed at a one-week high, with the Dow Jones up 1.29 per cent -- boosted by surprisingly positive US durable goods data, as well as hopes that Bernanke will signal more quantitative easing on Friday.

Last year Bernanke used the event to lay the path for the second phase of asset-purchases, dubbed QE2.

The Fed could instead go for “Operation Twist” -- seeking to flatten the US yield-curve by purchasing long-term Treasuries while issuing short-term bills, analysts have speculated.

But hedge funds opened the biggest short positions on the US S&P 500 index since 2008, data showed, in anticipation of more stock price falls to come if QE3 isn’t implemented.

Meanwhile the Congressional Budget Office (CBO) said that the US will rack up $3.487 trillion in cumulative deficits over 10 years, some $3.3 trillion below its last projection, although unemployment and growth could turn out worse than expected.