Gold Falls 3%, Biggest One-Day Drop in 2-1/2 Months

(REUTERS) -- Gold fell 3 percent on Wednesday for its biggest one-day drop in 2-1/2 months, as a dollar rally following U.S. Federal Reserve Chairman Ben Bernanke's comment on an encouraging job recovery prompted funds to heavily unwind bullish bets.

Bullion fell as much as $80 from its session high, as losses began to snowball at 10 a.m. EST (1500 GMT) when the dollar accelerated gains after Bernanke said the decline in U.S. unemployment rate has surprised economists. However, he added that job market was still far from normal.

Gold's decline dwarfed losses in U.S. equities and the euro after Bernanke's congressional testimony. Technical selling also pressured bullion after it failed to sustain gains above Monday's high at about $1,790 an ounce.

(Bernanke's) statement that employment is recovering at a better-than-expected rate implies that if quantitative easing is coming, it won't be for a while, said Steve Scacalossi, director of global precious metals at TD Securities.

Bernanke's remarks hit gold particularly hard because heavy bullish bets had been positioned leading up to the European Central Bank's offering of low-interest three-year loans as the ECB bought more time to sort out the debt crisis, Scacalossisaid.

Spot gold was down 3.3 percent at $1,724.40 an ounce by 12:05 p.m., having hit a near two-week low at $1,707.04.

Earlier in the session, bullion touched a 3-1/2 month high at $1,790.30 after the ECB completed its second liquidity offering worth over half a trillion euros to banks.

U.S. gold futures for April delivery tumbled $62.50 at $1,725.90 an ounce.

Trading volume started out quietly but exploded after 10 a.m. that included 30,000 lots of the April contract trading in a five-minute span between 10:50 a.m. and 10:55 a.m.

Total turnover was around 240,000 lots so far, on track to be one of the busiest days since September 2011, preliminary Reuters data showed.

After gold's sell-off, funds were heavy buyers of December $1,500 put options as some looked to profit and others tried to protect further downside risks in their futures, said Jonathan Jossen, a COMEX gold options floor trader.

It was a quiet, thin market which got overwhelmed with an influx of orders, creating this aberration, said George Nickas, precious metals broker at INTL FCStone.

Silver also gave back what it made yesterday, but stability should return soon.

Spot silver was down 5.2 percent at $34.98 an ounce, wiping out its 4 percent gain on Tuesday.