Gold fell more than 2 percent on Monday, as weaker oil prices and recovery in the dollar prompted investors to take profits from the metal's recent 28-year highs.
Bullion also came under pressure on technical selling and a decline in global shares as fears about credit-related losses at financial firms forced investors to reduce bets on risky trades.
Spot gold fell as low as $813.70 an ounce before rising to $814.50/815.30 by 6:15 a.m. EST, against Friday's quote of $832.30/833.10 late in New York and last week's $845.40 -- the highest since January 1980.
The currency and equities markets are going through another bout of risk reduction as investors continue to worry about subprime related writedowns in the financial sector and the state of the U.S. economy, Tom Kendall, metals strategist at Mitsubishi Corporation, said.
As a result the yen and the dollar are both materially stronger and commodity prices are lower across the board. We may see gold test support at $810 and possibly even $800 before this correction has run its course.
The yen sprinted to an 18-month high against the dollar as investors unwound risky carry trades. The euro slipped against the U.S. currency, pulling back from Friday's record high.
Worries about U.S. financial institutions' losses from the subprime mortgage crisis, and ensuing credit market turmoil, were renewed on Friday when Wachovia Corp reported a potential $1.7 billion loss on mortgage-related debt.
Gold traditionally has been used by investors as protection against economic and political uncertainty. But sometimes it behaves much like other financial assets because of the growing role of commodities in diversified portfolios.
FURTHER DDROPS LIKELY
With positioning still high, gold remains vulnerable to further losses although the key here will be the direction of the dollar, John Reade, metals analyst at UBS Investment Bank, said in a daily research note.
If risk aversion triggers further dollar weakness, then gold should hold quite well and may even move higher on safe haven buying. But if risk aversion sees some dollar repatriation, then further losses will materialize.
Tokyo's Nikkei average tumbled 2.48 percent, the lowest close since July 27, 2006, while MSCI's measure of other Asia Pacific stocks shed 3.33 percent to seven-week lows. European shares were flat to marginally higher.
In other markets, December U.S. gold futures fell $18.5 an ounce to $816.20 on electronic trade, while the Tokyo gold contract for October 2008 delivery ended down by the 120 yen daily limit at 2,923 yen per gram.
We view this retreat by gold as a technical reaction to the advances last week. Market players increasingly fear a strong correction once supporting factors, such as the galloping oil market and the weak US dollar, start to wane, Commerzbank said.
Oil prices, however, fell more than $1 a barrel after Saudi Arabia said OPEC would discuss boosting oil output at an upcoming meeting to cool surging oil prices.
The market ignored news that 10,000 miners were on strike at South African mines including Anglo Platinum and Impala Platinum on Monday. The firms said their output had not been affected.
In other metals, silver fell to $15.11/15.16 an ounce from $15.47/15.52 in New York, palladium dropped $3 to $366/369, and platinum fell to a 3-week low of $1,414. It was last quoted at $1,416/1,420, against $1,427/1,431.
The market awaited a report by Johnson Matthey, the world's largest refiner and fabricator of platinum, on Tuesday on the price outlook and demand and consumption trends.
(Additional reporting by Lewa Pardomuan in Singapore)
(Reporting by Atul Prakash; Editing by Michael Roddy)