Gold dropped to its lowest level in more than a week on Friday, as weak US inflation data and heavy inflows to government bonds from the equity market prompted funds to sell the metal.
A fresh outflow from the world's largest gold exchange traded fund and a report showing weak energy costs pushing US consumer prices lower for a third straight month have undermined appetite for the precious metal.
"The data was a bit disappointing, and it created a deflationary scare. There was a move out of paper assets and equities into Treasuries, and precious metals were caught in the middle," said James Steel, chief commodities analyst at HSBC.
Gold prices ended the week almost 2 percent lower, and the market has been largely treading water after news of massive gold swap operations conducted by the Bank of International Settlements in recent months stirred fears of gold dumping.
Spot gold slipped as low as $1,185.85 an ounce and was at $1,189.65 an ounce at 2:39 p.m. EDT, against $1,207.75 late in New York on Thursday. US gold futures for August delivery settled down $20.10, or 1.7 per cent, at $1,188.20.
Sharp doses of fund selling sent gold futures prices sharply lower in early sessions just after the US COMEX open.
COMEX floor trader Jonathan Jossen said there was heavy selling of gold call options by a fund manager in early trade.
Gold hit a record $1,264.90 an ounce in late June, after worries over the sovereign debt of some euro zone economies sparked buying of the metal as a haven from volatility in the currency markets. As those fears recede, it has slipped back.
"The story of Spain, Portugal and Greece is now calming down and people are taking their chips off the table, so we are seeing gold under pressure," said Jeremy East, global head of commodity derivatives trading at Standard Chartered.
Gold's decline coincided with gains in US Treasuries, as falling inflation and tumbling consumer sentiment enhanced the allure of safe-haven government bonds. Wall Street dropped 2.5 per cent after data showed consumer sentiment fell to an 11-month low.
Independent investor Dennis Gartman's reassessment of his long-held strategy of buying euro-denominated gold also dented sentiment, as the common currency is now sharply reversing its losing trend.
"Gold in US dollar terms may still be, and probably is, in a bull trend, but gold in EUR terms may now be a broken trade," Gartman said in his daily Gartman Letter on Friday.
The euro touched a two-month high versus a broadly weaker dollar on Friday. The euro has risen more than 9 per cent from a four-year low in June after smooth government debt auctions in Greece, Portugal and Spain eased concerns about the euro zone's sovereign debt problems.
Gold was also under pressure from a further 0.608-tonne outflow from the world's largest gold exchange-traded fund, the SPDR Gold Trust, on Thursday, which analysts said points to weaker investment demand for the metal.
Silver slipped in line with gold, with spot silver last at $17.80 an ounce against $18.26.
Platinum was at $1,513 an ounce against $1,522.15, while palladium was at $450.50 against $462.28.
Like other industrial metals, platinum group metals are being weighed down by concerns over economic growth.
