Gold prices fell to a 4-1/2-month low on Monday, as the dollar strengthened and investors liquidated risky assets after political deadlock in Greece fed worries that the country could default, worsening the euro zone debt crisis.
"The selling is from continued concerns over Europe and particularly Greece. Gold is behaving as a risk asset. We're obviously continuing to see upward pressure on the dollar against the euro," said CIBC, Peter Buchanan, senior economist at CIBC World Markets in Toronto.
Greek political leaders stuck to entrenched positions, pushing coalition talks into a third day on Tuesday, dashing hopes of a compromise to avoid a new election that could send the country closer to financial default.
Spot gold hit a session low at $1,556.50 an ounce, its lowest since Dec. 30, 2011. It recovered slightly to trade at $1,561.55 an ounce at 2:32 EDT, down 1.1 percent from $1,578.30 hit late Friday in New York.
Benchmark June gold futures lost $23, or 1.38 percent, to settle at $1,561 per ounce, after trading as low as $1,555, a level last seen on Dec. 29.
Gold has moved in tandem with riskier assets this year as turmoil in Europe sank the euro and investors turned to the safety of the dollar, analysts said.
"Gold is under severe pressure. The U.S. 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. If we don't stop there we could go below $1,500," he added.
The euro fell to its lowest level in nearly four months versus the dollar on fears Greece could exit the euro, worries the euro zone may be heading for recession, and German conservatives crushing defeat in an election in Germany's most populous state.
Euro-zone industrial production fell unexpectedly in March, bolstering the view the bloc may face recession.
The defeat of Germany's conservative party in Germany's most populous state could embolden the opposition to step up attacks on Chancellor Angela Merkel's European austerity policies 18 months before she stands for a third term in national elections.
Merkel said the setback would not alter her view on how to achieve growth.
Some analysts said the European Central Bank may ease further to support the bloc's economy. This could further weaken the euro against the dollar, weighing on gold, unless investors believe the Federal Reserve could launch a third round of government bond purchases, or quantitative easing.
"There may be some concerns that the market has been overestimating the likelihood of another round of quantitative easing. So, the Fed minutes on Wednesday may throw some cold water on that and be unsupportive of gold," said Buchanan.
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.
"In our view, recent (gold) market activity is consistent with distressed selling and long liquidation," Morgan Stanley analysts wrote in a note.
"Nevertheless, we think gold prices will recover in the coming weeks. The fundamental factors that have driven the gold bull market of late remain very much in place."
Prospects of physical demand for gold were dampened by China's move on Saturday to loosen monetary policy, which put into question whether its central bank would keep buying gold for its reserves.
"We had negative economic data from China and India, two of the world's largest physical purchasers of gold, which may reduce physical buying from those countries," said Buchanan.
While platinum group metals tumbled with gold, analyst said they think their longer-term prospects are more positive.
Spot platinum fell 1.95 percent to $1,431.58 an ounce, spot palladium lost 1.63 percent to $589.75 an ounce, and spot silver was down 2.42 percent at $28.21.
Platinum and palladium prices are expected to end the year higher, a Reuters poll conducted for Platinum Week showed, as constraints on supply and improving demand tighten the market.
The global palladium market may swing into deficit this year, potentially pushing prices of the autocatalyst metal to nine-month highs, as top producer Russia sells its state stockpile, refiner Johnson Matthey said on Monday.
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