JUN. 1 11:38 A.M. ET Gold and silver prices dropped sharply Thursday in a sell-off sparked after the U.S. Federal Reserve hinted in its minutes released Wednesday that it will likely continue hiking interest rates as inflation nears the end of its comfort level.

Gold, traditionally regarded as a hedge against inflation, would become a less attractive investment if the Fed is raises interest rates to curb inflation.

In morning trading on the New York Mercantile Exchange Thursday, August gold fell $18.80 to $630.20 an ounce. Earlier, the contract had dipped as low as $625.70 an ounce -- its lowest level since April 21.


July silver followed, falling 60.5 cents to $11.85 an ounce by morning trading Thursday. The contract traded earlier as low as $11.53 -- its lowest level since March 31.

Leonard Kaplan, president of Prospector Asset Management, said the metals markets were under the impression that the Fed would pause in its rate hike moves, but the Fed's hawkish comments have added downside pressure.

In its minutes released Wednesday, the Fed said that "it seemed most likely that, with modest further policy action, including a 25 basis point firming (on May 10), growth in activity would moderate gradually over coming quarters, pressures on resources would remain limited, and core inflation would stay close to levels experienced over the past year," the minutes stated.

But market players noted that inflation numbers have worsened since the May 10 meeting, leading to speculation that officials may tighten again in June.

Underlying inflation measured by the consumer price index excluding food and energy increased 0.3 percent in April, following an equal gain in March.

Amid the hawkish statements, traders said funds -- which had been leading a big surge in precious metals over the past several months -- started a selling spree in gold.

"The FOMC minutes were the catalyst (for the sell-off)," said John Person, president of National Futures. He added that August gold on the Comex division of the New York Mercantile Exchange could dip to $600 to $620 an ounce.

At those support levels, market players who have not been in the gold market thus far will see that as a buying opportunity. "What we are seeing is a nice price correction due to the Fed's vigilance on inflation," Person said.

Also adding to the pullback in precious metals were market perceptions of some easing in U.S.-Iran tensions, after the United States said Wednesday it would join multilateral talks if Iran suspends its nuclear enrichment program, according to analysts at Barclays.