LONDON: Gold dropped on Tuesday after the outflow from the biggest gold exchange-traded fund (ETF) accelerated, indicating investors' weakening confidence in the precious metal, and as a stronger dollar put pressure on prices.
The metal retreated from the previous session's one-week high as investors were nervous about holding onto positions for any length of time, traders said. Ardent gold bulls were caught out last Monday when gold posted its biggest-ever daily loss in dollar terms.
Gold fell 1.1 percent to a session low of $1,409.54 an ounce early in the day and was down 0.8 percent at $1,414.41 by 1043 GMT. Gold has dropped around 15 percent this year.
US gold futures for June delivery also fell 0.5 percent to $1,413.60.
"Gold is lower as well as other commodities including crude oil and base metals, which fell after weaker-than-expected economic data out of China and Europe, which gave a boost to the dollar," Commerzbank analyst Carsten Fritsch said.
The dollar rose against the euro and a basket of other currencies, while London copper fell to a fresh 18-month low and crude oil was down nearly 1 percent, after data revealed a slowdown in business activity in Germany and China in April, heightening concerns over global growth.
"Gold is also lower as continued ETF redemptions dent the positive case for gold at the moment. We don't expect prices to recover to pre-selloff levels any time soon," Fritsch said.
Holdings on SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, tumbled 1.6 percent to the lowest level since November 2009 at 35.51 million ounces. That followed daily falls of below 1 percent in the past week.
Gold has been caught in a tug-of-war between physical buyers seeking bargains and wary investors, who are cutting exposure on nagging worries about central bank gold sales and prospects of an end to inflationary monetary policy.
The metal had come under pressure earlier this month after the European Central Bank (ECB) and International Monetary Fund asked
Cyprus to sell reserves to raise around 400 million euros ($523 million) as part of its bailout deal, leading to speculation other indebted euro zone countries could follow suit.
In an interview with Reuters, the Cypriot Finance Minister Harris Georgiades said, however, that the government was not giving priority to the sale.
Physical buying persisted in Asia, even though spot gold has rebounded more than $100 from last week's lows of $1,321.35. Premiums for gold bars were at multi-month highs in Singapore and Hong Kong as supply also tightened for coins and other products.
"The strong response from physical markets is a significant component impacting sentiment as well as an important reminder that this demand can offer support during times of weakness," UBS analyst Joni Teves said.
"Nevertheless, it will take time for the market to fully heal and for conviction to be regained."
India, the world's largest gold consumer, next month celebrates Akshaya Tritiya, a key gold-buying festival, while the wedding season continues till early June. Indian parents give gold jewellery to their daughters at weddings as a custom.
Among other precious metals, silver fell 2.7 percent to $22.74, platinum lost 0.9 percent at $1,415.49 and palladium was down 1.4 percent firmer at $670.72.
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