Gold prices have swung into defensive mode on fresh signs of resurgence in the U.S. economy, wilting the metal's safe haven appeal. Traders foresee further downside potential as stronger-than-expected economic data argues for an earlier rise in U.S. interest rates.
One major indication of gold's increased sensitivity to U.S. statistics was the metal's slump on Friday to $1,163 per ounce, its lowest price in three months, after the labor department released data showing non-farm payrolls grew more than expected in February.
Other recent data on U.S. private employment and durable goods orders has also hurt gold. In the coming weeks, data on housing, jobless claims and gross domestic product will be closely watched for clues on the strength of the economy.
While the possibility of a U.S. rate hike has clouded the gold market for more than a year, analysts said the metal's drop on Friday, the steepest decline linked to U.S. non-farm payrolls data since May 2009, was notable.
"While a rising rates environment bodes ill for gold, its sensitivity to Friday's data highlights that, the gold market at least, has not fully priced in a rate hike," Barclays analysts said in a note.
Investor positioning in recent days has begun to show increasing caution, with holdings of the world's top gold fund, SPDR Gold Trust, falling to their lowest in more than a month on Monday.
Markets continue to underestimate Federal Reserve rate hikes this year and next year, says MKS Group's senior precious metals dealer Alex Thorndike.
The current market consensus is for the Fed to begin raising rates sometime in the middle of 2015. Rates have been kept near zero since the 2008 financial crisis.
Adding to the pressure on gold is the strength of the dollar, which is trading at an 11-year high against a basket of major currencies after the U.S. jobs report.
ANZ expects gold to drop to $1,100 per ounce in the next three months due to a stronger greenback, before recovering slightly to end the year at $1,225.
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