LONDON — Gold dropped on Tuesday as the dollar strengthened against the euro, while support from the physical market softened as main buyer China remained on holiday.
Although gold’s appeal as a hedge against inflation may be enhanced by prospects the US Federal Reserve will maintain its bond-buying programme, surging stock markets were encouraging investors to ditch bullion and shift to equities.
Gold fell 0.2% to $1,472.26 by 9.51am GMT. It had gained nearly 1% on Monday on expectation the Fed would keep the pace of its bond buying unchanged at $85bn a month following weaker than expected US growth.
US gold for June delivery rose 0.3% to$1,471.70 an ounce.
"There has been a bit of short-covering rally after the price sell-off in mid-April and to some extent that rally is now subsiding," Bank of America Merrill Lynch analyst Michael Widmer said.
Short-covering occurs when traders are forced to buy an asset they had agreed to sell at a future date in anticipation its price would fall.
"I think we are going back to that environment where investors struggle to see reasons to purchase gold and the physical market is slowing down as prices are rallying," Mr Widmer said.
Gold prices sank to $1,321.35 on April 16, their lowest in more than two years, after a drop below $1,500 led to a sell-off which stunned investors, and prompted them to further slash holdings of exchange-traded funds.
European shares rose and the dollar edged higher versus the euro as investors positioned for the US Federal Open Market Committee (FOMC) and the European Central Bank (ECB) to extend monetary stimulus measures.
The Fed is buying longer-dated US Treasuries and mortgage-backed bonds every month and is expected to vote to keep doing so at the conclusion of a two-day policy-setting meeting on Wednesday.
Other data this week include the US consumer sentiment later and nonfarm payrolls on Friday.
"It is a wait-and-see week, with Chinese holidays, FOMC meetings and nonfarm payrolls," Marex Spectron precious metals head David Govett said.
"This will make it hard to predict where we go for the short term. Gold’s correlation with the dollar seems to be particularly close at the moment, so use this as a short term indicator."
SPDR holdings set for record fall
The SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, said its holdings fell 0.22% to 1,080.64 tonnes on Monday to their lowest since September 2009.
The fund’s holdings were set for a record monthly decline of 11.5%.
In the physical market, buying subsided after a recent rush as China, the world’s second-largest gold consumer, is on holiday until Thursday for May Day celebrations.
Supply of gold bars, coins and nuggets in Asia remained tight, however, with premiums for gold bars in Hong Kong reaching their highest level since October 2011, up to $3 an ounce to spot London prices this week.
Silver fell 0.7% to $24.33 an ounce.
Platinum rose 0.2% to $1,508.49 an ounce, having reached a two-week high of $1,522 on Monday. Palladium was unchanged at $696.25, having hit a two-week high of $700.72 earlier.
Platinum benefited from renewed supply issues in main producer South Africa, where third largest miner Lonmin shut down its Number Two furnace for 30-40 days following an undisclosed incident.
Anglo American Platinum said it was concluding its final plan to restore profit through shaft closures and lay-offs, and further delayed an announcement to next week.
