Price of gold falls below $1,200 – from highs of $1,895 in 2011 – as Federal Reserve's QE comments dampen fears of inflation

The price of gold has tumbled to less than $1,200 (£787) an ounce, its lowest point in nearly three years, as concerns over the US Federal Reserve's plans to rein in financial stimulus continue to unnerve markets.

After dropping to $1,180 late on Thursday, gold made a small rebound on Friday morning to $1,202, but not enough to stem expectations that prices would continue to weaken.

The shine has come off gold since the precious metal hit highs of $1,895 an ounce in 2011, buoyed by its status as a safe haven for investors. Over the last fortnight prices have dropped by around 15% – the steepest fall in 30 years – largely driven by a strong signal from the chairman of the Federal Reserve, Ben Bernanke, that he intends to cut back the US central bank's $85bn-a-month stimulus programme. Gold is used by investors as a hedging bet against rising inflation, but fears of a reduction in QE are damping concerns of higher prices because less central bank cash will ultimately flow into financial institutions.

Chinese traders have stopped buying gold, while demand in India is muted, contributing to the 30% drop in gold values this year.

"Everything that had been driving gold up has gone into reverse," said Julian Jessop, chief economist at Capital Economics.

Demand for safe havens was diminishing as the worst of the crisis in the eurozone appeared to be over, he said. At the same time, commodities were out of favour, Chinese and Indian demand for gold had dropped after a spring surge, while demand for protection against rising prices had faded amid falling expectations of inflation. "Gold's own status as a safe haven has been undermined by the recent weakness and volatility in prices, at the same time as the markets are regaining confidence in the US dollar."

The plunge in gold prices has taken analysts by surprise, making price forecasts quickly out-of-date. At the start of the week the Standard & Poor's rating agency was predicting gold prices of $1,350 for 2013.

Judging where gold would sink to was "like catching a falling knife", said Jessop. "Now is perhaps not the best time to try to call the bottom in the price of gold. Nonetheless, it seems premature to write gold off completely."

Capital Economics is predicting gold will end the year at $1,320 per ounce, down from an earlier forecast of $1,700.

Goldman Sachs recently predicted that gold prices would fall to around $1,050 by the end of 2014.

The Standard & Poor's rating agency also cut its price forecast for gold earlier this week, although it is banking on higher prices, with a long-term forecast of $1,200.

The gloom about gold was not mirrored on Japan's stock market, with Asian shares up for the third consecutive day, following positive data about the expanding jobs market. The Nikkei index rose 3.5% on Friday, putting it on course to end the first half of the year 31% higher. The rally may be seen as a vote of confidence in the plan of the Japanese prime minister, Shinzo Abe, to restore the economy to health with a radical ¥7tn (£46bn) stimulus programme.