Gold prices plunged 5.6 percent Wednesday as investors grew more confident about the global economy.
Gold dropped $104 to finish at $1,757.30 an ounce. It was the steepest percentage drop since March 2008. Gold is still up 24 percent for the year.
After markets closed Wednesday, exchange operator CME Group said it was raising its collateral requirements for gold trading. Earlier Wednesday China also required traders to set aside more collateral when borrowing money to buy gold.
Investors have been buying gold because of concerns about economic weakness in the United States and Europe as well as a stretch of severe volatility in financial markets that began in early August.
Recent economic news has been more encouraging. The government said Wednesday that orders rose 4 percent in July for long-lasting goods such as cars and aircraft, the biggest increase since March. Retail sales and industrial production were also better last month.
The improvement in economic news, combined with higher stock prices this week, eased investors' jitters. In the past two days investors have sold gold following its recent run-up.
Gold is seen a relatively stable investment that investors use as a hedge against losses in other holdings, especially when the economy seems weak and financial markets are volatile. Gold has been climbing at a record-setting pace, reaching $1,900 an ounce for the first time on Monday. Gold is still below the level it reached in 1980 after adjusting for inflation.
Unlike stocks or bonds, gold doesn't pay any interest or dividends, nor does it represent ownership in a company. Its value is strictly tied to what investors are currently willing to pay for it. And that, says Cetin Ciner, a professor of finance at the University of North Carolina-Wilmington, is exactly where the problem lies.
"When you have something so subjected to investor psychology, you can see extreme reactions," Ciner said.
Some analysts believe gold prices have been climbing so high, so fast that it was time for a correction. "I think it was overbought, yes. I think the rally was too quick during a short amount of timespan," CPM Group analyst Carlos Sanchez said.
In other trading, energy and metals products were mixed while wheat, corn and soybeans fell. One factor was a stronger dollar. Since commodities are priced in dollars, a stronger dollar makes them more expensive for buyers who use other currencies.
Silver for September delivery fell $3.129, or 7.4 percent, to finish at $39.162 an ounce, September copper rose 0.2 cent to $3.998 a pound, October platinum fell $53.80 to $1,826.30 an ounce and September palladium fell $21.25 to $743.15 an ounce.
Benchmark crude oil for September delivery fell 28 cents to end at $85.16 per barrel on the New York Mercantile Exchange.
In other Nymex trading, heating oil rose 1.98 cents to $2.969 per gallon, gasoline futures increased 0.86 cent to $2.7558 per gallon and natural gas fell 7.1 cents to $3.922 per 1,000 cubic feet.
December wheat fell 7.25 cents to end at $7.7725 a bushel, December corn declined 0.5 cents to $7.43 a bushel and November soybeans fell 3.75 cents to $13.935 a bushel.
AP Business Writer Bernard Condon contributed to this report.