Gold Bar
Gold prices sank to a three-year low on 19 DecemberReuters

Gold prices dropped to a three-year low on 19 December and remained on track to log their first decline in 13 years.

Gold prices dropped 3.3% to $1,195 an ounce on Thursday, the lowest finish since August 2010, after the US Federal Reserve said it would trim its historic stimulus programme, a move that would dent the metal's safe-haven investment allure.

Big-ticket investors bet that the Fed's extraordinary stimulus measures, rolled out after the 2008 financial crisis, would pull down the US dollar and fuel inflation, boosting gold's investment-hedge attraction.

That assumption drove Greenlight Capital's David Einhorn, Paulson & Co's John Paulson and Third Point's Dan Loeb to invest in gold, reported The Wall Street Journal.

However, inflation remained subdued even after the Fed injected in excess of $3tn into the US economy. The dollar weakened in 2009 and much of 2011 but strengthened thereafter.

Many investors got burned this year as gold prices fell on Fed stimulus taper fears. Prices have fallen 29% so far this year.

Paulson's gold fund lost 63% in the 10 months to October, according to company data. The fund managed assets worth $370m as of November, against about $1bn near the beginning of the year.

Third Point exited a long-held gold position in the second quarter

"You've had this watershed moment," said Sameer Samana, a senior international strategist with Wells Fargo Advisors.

"The economy's starting to firm. Instead of inflation expectations ticking higher and interest rates lower, the opposite is going on. That's really gotten the steam to come out of gold," Samana told WSJ.

"The reasons to own gold have just evaporated," said Jeffrey Sherman, commodities portfolio manager with DoubleLine Capital, a Los Angeles money manager that handles assets worth $53bn. DoubleLine sold its gold holdings at a loss after a steep fall in prices this spring.

The precious metal hit its record high of $1,888.70 an ounce in August 2011.

Back then, traders were trying to make sense of a European debt crisis, the unparalleled downgrade of the US's credit rating and the possibility of another round of asset-buys by the Fed.