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Gold recoiled from its first ever foray above record $1,900 (U.S.) an ounce Tuesday in the sharpest one-day drop in 18 months, as rebounding equities prompted traders to rethink a bullion rally which many now see as overdone.

In the spot market, the precious metal fell almost $90 from a record high $1,911.46 overnight as the Dow Jones industrials surged 2.5 per cent on better-than-expected Chinese and German factory output data.

"Gold has reached that point where it moves $40-$50/ounce in a moment's notice. That is not an investment that is safe, indeed it is far from safe; it is violent; it is mass psychology incarnate and it is scary," Dennis Gartman wrote in The Gartman Letter on Tuesday.

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Overnight, a hike in margin requirements for gold forwards on the Shanghai Gold Exchange helped curb gold's scorching rise.

Analysts warn of a possible sharp correction after bullion rose as much as 8 per cent in the last three sessions, and by more than $400 since July.

"In the same way that the world became over-reliant on the U.S. dollar as a reserve currency, I think we should exercise a bit of caution in becoming over-reliant on gold," said Simon Weeks, head of precious metals at the Bank of Nova Scotia in London.

"I don't think it needs to be as high as it is at the moment," he said.

Spot gold was down 3.7 per cent at $1,826.60, its biggest one-day percentage loss since February, 2010, after reaching $1,911.46 in overnight trading.

U.S. December gold futures settled down $30.60, or 1.6 per cent, at $1,861.30 an ounce. After the close it extended its slide to below $1,830. Trading volume was near 370,000 lots, set to be one of the heaviest trading days this year.

Spot silver was down 5 per cent at $41.58 an ounce.

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All eyes will be on Federal Reserve Chairman Ben Bernanke's speech at Friday's central banker meeting in Wyoming's Jackson Hole.

Analysts said anything short of a third round of quantitative easing would likely provide limited support for gold as the Fed had already vowed to keep interest rates low into 2013.

"There is some potential degree of 'Buy the rumor, Sell the news' on any future Fed policy that may come out at Jackson Hole. Investors might want to have that on the back of their minds as well," said Michael Cuggino, portfolio manager of the $15-billion Permanent Portfolio Funds.

The gold-to-platinum ratio remained near parity, a state it reached last week for the first time since December, 2008, as gold traded increasingly strongly compared to platinum.

Spot platinum was down 2 per cent at $1,862.24 an ounce, and spot palladium was down 0.1 per cent at $757.22 an ounce.

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