Gold futures fell the most since July as an unexpected interest-rate increase by China spurred gains for the dollar, curbing demand for bullion as an alternative investment.
The greenback jumped as much as 1.6 per cent against a six- currency basket. Gold has rallied 22 per cent this year, touching a record $US1388.10 an ounce on Oct. 14, as central banks around the world kept interest rates low to revive the global economy.
"China reminds the world that a central bank can in fact raise rates," said Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago. "It strengthens the dollar and slows down expansion, and will give gold a decent correction."
Gold futures for December delivery fell $US36.10, or 2.6 percent, to settle at $US1336 an ounce on the Comex in New York. It was the biggest decline for a most-active contract since July 1.
China's one-year deposit rate will rise to 2.5 per cent from 2.25 per cent, effective tomorrow. The lending rate will increase to 5.56 per cent from 5.31 per cent. This is the first increase for both rates since 2007.
"The Chinese have taken steps to rein in the spending and mitigate some of the inflation," said Adam Klopfenstein, a senior market strategist at Lind-Waldock in Chicago. "That's going to hurt any asset that's an inflation hedge. Gold is dropping heavy."
The Federal Reserve has kept its main lending rate between zero per cent and 0.25 per cent since December 2008. Fed Chairman Ben S. Bernanke said last week additional monetary easing may be warranted.
Investors have been placing record bets on gold. Open interest, or futures contracts yet to be closed, liquidated, or delivered, rose to 638,283 as of Oct. 14, according to data from Comex. On Oct. 7, daily trading in gold options reached a record 102,292 contracts.
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