Gold fell to its lowest in ten weeks on Tuesday, putting the price on course for its worst monthly performance in 13 months as safe-haven demand evaporated and investors booked further profits on the 2010 rally.
Strong consumer demand, particularly in Asia, continues to provide a floor for the price and a significant decline in speculative holdings of gold futures has taken some of the pressure off.
But investor sentiment toward gold has soured in the last few sessions, as evidenced by the largest one-day outflow in three months from the world's biggest exchange-traded gold fund.
Risk aversion is definitely much lower at the moment than it was a few weeks ago, said Commerzbank analyst Daniel Briesemann.
It is becoming increasingly clear that especially as the debt crisis in the euro zone periphery calms, investors feel less of a need for safety, he said, adding: That's a major reason for letting gold fall as much as it has over the last couple of days.
Spot gold was last at $1,326.90 an ounce by 1227 GMT, down 0.5 percent on the day on course for a 6.5 percent decline in January which would be the biggest monthly fall since a 7-percent drop in December 2009.
U.S. gold futures for February delivery were down 1.3 percent at $1,327.00 an ounce.
EFSF BONDS FLY
Adding to the case against gold for now was strong demand at the euro zone rescue fund's first debt offer, which pushed the euro to two-month highs.
The European Financial Stability Facility (EFSF) launched its first sale of bonds and market sources said demand, at 48 billion euros, dwarfed the 5 billion on offer.
The euro's rise to two-month highs did little to stem the decline in the gold price, which because of its usual inverse link to the U.S. currency, usually profits from dollar weakness.
However, this correlation has eroded over the last week and has reached its most positive in four months, meaning gold is moving more frequently in lockstep with the dollar.
The improved economic data, combined with speculation that the European Central Bank might raise interest rates, pushed the euro to a two-month high. The single currency held near the peak on Tuesday.
The gold market is a bit negative for the time being, said Ronald Leung, a physical trader at Lee Cheong Gold Dealers, adding that talk of further tightening from China before the Lunar New Year holiday also adds to the bearish sentiment.
But on the physical side, people are still buying. There doesn't seem to enough supply in the physical market.
India's central bank raised key interest rates on Tuesday in a bid to clamp down on resurgent inflation and warned that higher food prices could become entrenched if steps to boost output are not taken.
Even with price pressures building up in the emerging world, investors are shifting out of gold right now.
Holdings in the SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 10.926 tonnes, its biggest one-day decline since early October, to 1,260.843 tonnes by Jan 24.
Spot silver fell to $26.76 an ounce, down 0.6 percent, having earlier fallen to $26.55, its lowest in nearly two months.
ETF flows have also been an undermining factor for silver. Holdings of metal in the iShares Silver Trust, the world's largest silver ETF, have fallen by 425.3 so far this month, worth about $364 million at today's silver prices.
ETF Securities' London-listed silver product has seen an outflow of well over 500,000 ounces in less than week. (PHPT.L)
The platinum group metals were not immune to the flurry of profit-taking that dented gold and silver.
Platinum fell for a second day, declining by 1.3 percent to $1,788.49 an ounce, while palladium dropped 2.6 percent to $788.22, set for its biggest fall in six weeks.