Gold fell below $1,130 (U.S.) an ounce Tuesday, losing 2 per cent as the news of China's tightening monetary policy curbed economic optimism, triggering heavy technical selling.
"Gold's decline has a lot to do with China's raising reserve requirements. It was massive liquidation after prices fell below important technical levels," said Bruce Dunn, vice-president of trading at New Jersey-based Auramet.
Platinum and palladium fell with gold's losses. The new U.S. exchange traded funds, however, should provide underlying support to prices after they bought a total of 170,000 ounces platinum group metals in the first two days after the funds' launch.
Spot gold hit a session low of $1,124.95 an ounce, and was last at $1,126.80 an ounce at 2:35 p.m. ET against $1,151.10 late in New York trade on Monday.
Technical selling dragged prices lower after spot bullion fell below its 50-day moving average at $1,130, analysts said. Support could be seen at its 100-day moving average at $1,074 an ounce.
U.S. February gold futures settled down $22, or 1.9 per cent, at $1,129.40 an ounce on the Comex division of the New York Mercantile Exchange.
China took its strongest step towards tightening monetary policy with an increase in banks' required reserves. The move came just days after China reported robust trade figures and was the first time that the central bank had adjusted the ratio since a cut in December, 2008.
A rise in interest rates, while seen by few as imminent, is nonetheless the next logical move, analysts said. U.S. rates slumped to historic lows in the fallout of the global economic slump triggered in 2007.
"Gold doesn't like real interest-rate environments which are very high and positive because it is a non-interest bearing asset," said Michael Lewis, head of commodities research at Deutsche Bank.
"It has a much better chance for competing for investment inflows in low or negative real interest-rate environments."
Crude oil fell 2 per cent on China's news and warmer U.S. weather, while Wall Street also dropped more than 1 per cent.
Bullion traders also cited a bearish report by the U.S. Agriculture Department, which bumped up its estimate for 2009 corn production to a record.
Gold often acts as a hedge against inflation for some investors, but at the same time its lack of yield makes it unattractive in an environment of rising interest rates.
Platinum was at $1,561 an ounce against its Monday late New York quote of $1,591.50. Earlier in the session, it reached $1,624, its highest since August, 2008, while palladium also hit an 18-month high of $439. It was last at $424 against $431.
Platinum and palladium prices touched their highest since mid-2008 earlier Tuesday as the launch of new investment products in the United States and hopes for a recovery in industrial demand fuelled buying.
"We have a new player on the market, and that is the new palladium and platinum ETFs being traded in the United States," said Commerzbank analyst Eugen Weinberg. "We have seen strong demand for them in the first two days of trading."
As of Monday, the ETFS Physical Platinum Shares have bought 80,000 ounces of platinum, while the Palladium Shares held 90,000 ounces of palladium, a ETF Securities spokeswoman said.
More than half of global platinum and palladium demand comes from car makers, which use the metals in catalytic converters for autos. Car demand figures are therefore closely watched by PGM traders. Analysts say investment buying sparked by expectations for a recovery in car demand in 2010 could lead platinum and palladium to outperform other precious metals this year.
Silver was at $18.22 an ounce against $18.55.
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- Updated January 27 10:28 PM EST. Delayed by at least 15 minutes.