NEW YORK/LONDON: Gold prices fell 2 percent on Thursday as upbeat US retail sales data boosted the dollar and stoked expectations that the Federal Reserve could reduce its bond-buying stimulus soon.
Bullion posted its biggest two-day drop since Oct 1. Silver slid 4 percent, while platinum group metals also fell sharply.
US retail sales rose solidly in November, another sign of a strengthening economy after last week's better-than-expected US nonfarm payrolls and GDP data, which could encourage the Fed to ratchet back stimulus efforts.
A two-year US budget deal cleared a procedural hurdle in the House of Representatives on Thursday, with passage expected. A budget deal should also move the Fed toward tapering its $85 billion a month bond-buying program.
"With the possibility of the budget debate behind us, it could bring to the forefront that the Fed is one step closer to tapering at its December meeting next week," said David Meger, director of metals trading at Chicago futures brokerage Vision Financial Markets.
Spot gold fell 2 percent to $1,226.86 an ounce by 2:13 p.m. EST (1913 GMT). Earlier in the session, gold hit a session low of $1,223.60 an ounce, holding just about $10 above a five-month low reached last week.
US Comex gold futures for February delivery settled down $32.30 at $1,224.90, with trading volume about 15 percent above its 30-day average, preliminary Reuters data showed.
Gold erased its gains made earlier in the week, when it hit a three-week high of $1,267.26 on Tuesday. But Comex gold option traders said they saw trades in their market suggesting that some investors were bullish on underlying gold futures.
Expectations that the Fed will taper its stimulus program have helped knock gold 25 percent lower this year. Ultra-loose monetary policy is seen as bullion-friendly, as it keeps interest rates at rock bottom while stoking inflation fears.
But the brightening US economic picture and a stronger dollar, up 0.4 percent versus a basket of currencies, punctured the rally.
PHYSICAL, INVESTMENT DEMAND SOFT
In the physical markets, buying in major consumer India remained soft on Thursday as dealers struggled to source metal.
Investor interest remained lacklustre, with holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Shares, down 2.1 tonnes on Wednesday.
This year has seen heavy liquidation of gold ETF holdings, with the SPDR's holdings dropping by more than 500 tonnes to their lowest in nearly five years.
Among other precious metals, silver dropped 3.9 percent to $19.48 an ounce. Platinum was down 1.4 percent to $1,360.74 and palladium down 2.7 percent to $715.25.
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