Tokyo gold futures slid 3.6 percent on Wednesday, falling by their daily limit for a second session as higher margin requirements and a stronger yen prompted profit-taking following the market's rally in the week.
Tokyo Commodity Exchange gold futures dropped by the daily limit of 75 yen, dragging down other precious metals. The key October TOCOM platinum also fell by its daily limit, down 135 yen or 3.5 percent.
The TOCOM exchange said on Monday it would raise margin requirements on gold futures from Wednesday to check market volatility. The measures followed a one-month, 20 percent surge in the market to an 18-year high on Monday.
"The downward correction is pretty heavy, but we've expected this to happen as the rise over the past month was simply too much," said Shoji Seagate, assistant manager at Mitsubishi Corporation Futures Ltd.
"TOCOM's move to raise margin requirements is also accelerating position unwinding." The margin for existing positions was raised to 100,000 yen per contract from 75,000 yen. For new positions, 50,000 yen to 125,000 yen raised the margin.
Key TOCOM gold futures were stuck at the limit low for most of the day and closed at 2,005 yen per gram, down 3.6 percent from Tuesday and 7 percent below an 18-year peak of 2,155 yen reached on Monday.
Other contracts also dropped by the daily 75-yen limit, except for the prompt December contract, which closed down 54 yen or 2.7 percent at 1,963 yen. "A further downward correction is possible as many people still haven't completed unwinding their positions," said Chen Chaur-Shi, vice president of Nihon Unicom's research department.
"Sentiment looks weak in the near term after heavy sales in the last two days, but the long-term trend is still bullish, that has not changed." The yen's rally, which has a negative effect on yen-based gold, also prompted investors to sell heavily.
The yen jumped to a two-week high against the dollar as traders rushed to book profits on the US currency's gains after clearing the last of the year's major economic events. The Japanese currency also gained after a Bank of Japan survey showed an improvement in Japanese business confidence, though the reading was weaker than forecast.
The yen was trading at 118.72/75 against the dollar, up about 1 percent from the level in late US trade.
The fall in TOCOM gold also pressured dollar-based spot bullion. Spot gold was trading at $513.60/514.35 an ounce, down 1.3 percent from $520.60/521.30 in New York. It had moved in a range of $513.20 to $518.50 in Asia.