Gold appeared headed for for its biggest two-day decline in almost three years. Before Tuesday's fall, it had rallied nearly 9 percent in six sessions on speculation the Federal Reserve might be planning another round of stimulus for the sluggish US economy.
Analysts said it was time for gold investors to take money off the table after a safe-haven rally extended too far, too fast in recent weeks. Bullion was up by as much as $400 since July.
"The correction really should be taking place now, because of all the (bets) on the table," said Ashok Shah, chief investment officer at London & Capital.
"But the journey is not complete until Jackson Hole is done," Shah said, referring to an annual central bank conference in Jackson Hole, Wyoming starting on Thursday
Spot gold was down 3 percent to $1,774.39 an ounce by 12:37 p.m. EDT (1637 GMT), off its session low of $1,762.90. On Tuesday, it dropped about 4 percent after an early rise to a record $1,911.46.
US gold futures for December delivery was down $55.46 to $1,774.39 an ounce. Trading pace was hectic with volume already topping 330,000 lots, set to be one of the busiest sessions of the year.
Silver dropped 3.6 percent to $40.30 an ounce.
While analysts predicted gold would remain in a structural uptrend, they said a sharp correction from this month's rally was possible, especially if the central bank meeting at Jackson Hole does not result in a Fed announcement of a third round of government bond buying, or quantitative easing, also known as QE3.
"Hopes that QE3 will continue to prop up commodity prices are at best premature. Gold is perhaps most vulnerable to disappointment," Capital Economics strategists said in a note.
CALL-PUT SPREAD NARROWS, MARGINS EYED
On the options front, the spread between the 25-day implied volatility of COMEX gold and that of put options has narrowed since Monday, a sign that gold option investors were turning bearish.
The CBOE gold volatility index is near at its highest since April 2009.
Investors also were watching for potential gold margin requirement hikes from the CME Group, after the Shanghai Gold Exchange raised margins on some of its gold forward contracts twice this month. The Hong Kong Mercantile Exchange also raised the margin requirement on its gold futures contract on Aug. 23 by nearly 26 percent.
Holdings of the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell by nearly 25 tonnes on Tuesday, their biggest one-day outflow since Jan. 25.
Among platinum group metals, platinum dropped 1.5 percent to $1,828.50 an ounce, and palladium was down 1.8 percent at $743.50 an ounce.
Copyright Reuters, 2011