Gold prices fell to a 4-1/2-month low on Monday, hit by concerns about a worsening debt crisis in the euro zone following political deadlock in Greece which fuelled risk aversion and put pressure on the euro.
Spot gold hit a session low at $1,559.81 an ounce, its lowest since late December 2011, before recovering slightly to trade at $1,561.40 an ounce at 12:56 SA time, down 1.1 percent from $1,578.30 late in New York on Friday.
Gold has moved in tandem with riskier assets this year as the turmoil in Europe sent the euro to multi-month lows and investors turned to the safety of the dollar, analysts said.
“Gold is under severe pressure. The US dollar is being seen as a safe haven at the moment and as long as the dollar is appreciating against the euro this is clearly weighing on the gold price,” said Daniel Briesemann, analyst at Commerzbank.
“I wouldn't be surprised if we test the December low of around $1,520 an ounce and if we don't stop here we could go below $1,500.”
Concerns about the euro zone crisis resurfaced after coalition talks in Greece hit an impasse on Sunday and Greece's radical leftist leader spurned an invitation from the president for a final round of talks on Monday, all but ensuring another election next month.
The euro fell to a near four-month low against the dollar, which rose against a basket of currencies. A strong dollar makes commodities priced in the US unit more expensive for holders of other currencies.
Also weighing on sentiment for the precious metal, money managers in gold futures and options cut their net long positions by 20 percent to the lowest level since December 2008, as investors aggressively unwound their bullish bets in the precious metal after a sharp price pullback.
US gold for June slipped 1.4 percent to $1,561.90 an ounce.
Reflecting risk aversion in financial markets, European shares fell to their lowest levels in more than four months, while safe haven German bund futures hit record highs.
Investors had turned to gold as a safe haven during the debt crisis last year, sending prices to an all-time high of around $1,920 an ounce. But this year, gold is trading more in line as a commodity that moves in the opposite direction to the US dollar.
PLATINUM, PALLADIUM TO RISE
Spot platinum fell 0.9 percent to $1,446.49 an ounce, while spot palladium fell 0.6 percent to $593.72 an ounce.
Prices of platinum and palladium are expected to end the year well above current levels, a Reuters poll conducted for Platinum Week showed, as constraints on supply and improving demand tighten the market.
Spot silver fell 1.7 percent to $28.35.
Sentiment was also dampened by China's move on Saturday to loosen monetary policy which underscored how Europe's plight is
hampering global growth.
The People's Bank of China cut the amount of cash that banks must hold as reserves on Saturday, freeing an estimated 400
billion yuan ($63.5 billion) for lending to add to the roughly 800 billion injected in two previous 50 bps cuts since the government tilted its policy stance towards growth in October.
In the physical market, jewellery makers and speculators took advantage of last week's drop in prices.
“We've seen physical buying interest. But people are still bearish about the market because of the strong dollar and worries that Greece won't be able to solve its problems,” said a dealer in Hong Kong.
“Investors are not so aggressive, and I think the jeweller sector is more important. Supply is a bit tight in the physical market.” - Reuters