Gold prices fell more than 1 percent on Monday as concerns over Spain's financial health pushed the euro to two-year lows against the dollar, pressured stock markets and drove Spanish borrowing costs to euro-era highs.
Investors grew more concerned on Monday that Spain may need a full bailout after a second region, Murcia, indicated it would need government help, likely following Valencia in tapping a government program to shore up its finances.
Pressure on the euro and the wider markets helped push spot gold prices down 0.9 percent to $1,570.04 an ounce at 1127 GMT. Earlier they touched a low of $1,568.04.
The great danger for the gold price is the stronger dollar, because of its long-term negative correlation to gold. That's definitely still dampening the interest of investors from the United States, Commerzbank analyst Eugen Weinberg said.
But in euro terms, gold is trading near six-month highs, so it's not as bad as it first looks. It's more about dollar strength than gold weakness, he said. It's difficult to see the pressure coming off (the euro). But as long as prices stay above $1,530, they are still in a stabilization phase.
European shares were down 2 percent after Spain's financial outlook took a turn for the worse over the weekend, while Spanish 10-year government bond yields hit their highest since the euro was launched.
The fear now is that Valencia's aid request is more than likely to open the floodgates for similar requests from the other 17 heavily indebted Spanish regions, CMC Markets said in a note.
Already speculation is increasing that Catalonia, or any one of a number of regions will be next. When that happens it will be pretty much nailed on that the Spanish government will then eventually need a bailout itself, stretching the funds of the EFSF to its limits.
Expectations for more euro weakness, and consequent dollar strength, later this year will likely keep gold under pressure.
MAJOR ETF SEES OUTFLOWS
From a technical perspective, gold is set to find support around $1,559/1,560, according to analysts who study past price patterns to determine the future direction of trade. Prices have held within a $1,525-1,675 range for more than three months.
Holdings of the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust dropped for a fourth consecutive week after a 2.4 metric ton outflow on Friday, down 15 metric ton, their biggest weekly decline since late December.
Gold demand from major consumers India and China also remained weak, analysts said.
Our sales to India do not indicate any improvement as yet and neither does combined gold volumes on the Shanghai Gold Exchange, which have been 30 percent below average this month, UBS said in a note.
Evidence of a significant response from physical buyers is needed first, before the investment community can be expected to follow suit.
U.S. gold futures for August delivery were down $12.30 an ounce at $1,570.50.
Silver was down 1.3 percent at $26.93 an ounce, while platinum was down 1.5 percent at $1,389.60 an ounce and palladium was down 1.5 percent at $562.60 an ounce.
Trade data from China, a major market for industrial precious metals, showed a 23.6 percent year-on-year drop in silver imports in June, a 29.6 fall in palladium imports, and a 31.8 percent rise in platinum inflows. In the year to date, imports of all three metals are down.
The gold/platinum ratio, which measures the number of platinum ounces needed to buy an ounce of gold, rose to 1.13 on Monday as the industrial metal underperformed.
Concerns over supply did little to support prices. The world's biggest platinum miner, Anglo American Platinum (AMSJ.J), said on Monday it is cutting its 2012 refined production target to 2.4-2.5 million ounces.
Acting chief executive Bongani Nqwababa told a results presentation he would not tolerate unprofitable ounces, a signal the group could move to close loss-making shafts.