Gold fell nearly 1.5 percent on Thursday, snapping a four-day winning streak as indications the European Central Bank may raise interest rates to battle inflation dented bullion's investment appeal.
ECB President Jean-Claude Trichet said the central bank would exercise strong vigilance over inflation and interest rate increases could come at ECB's next meeting in April, far earlier than markets expected.
Obviously, you have the European talk about higher interest rates down the road and a stalling crude rally, which are weighing on the market now, said Frank McGhee, head precious metals trader of Integrated Brokerage Services LLC.
Gold was also dragged down by diminishing safe-haven demand and sharply lower oil prices as Venezuela said its proposal for a negotiated solution to the Libyan conflict was accepted by the North African government and the Arab League said the plan was being considered.
You have everything that at least set us up for a day of profit taking, McGhee said.
Spot gold fell as low as $1,411.52 an ounce and was down 1.4 percent to $1,413.85 an ounce at 12:23 p.m.. The metal fixed at $1,421.50 in London.
U.S. gold futures for April delivery fell $22.50 an ounce to $1,415.20.
The metal retreated from the previous session's record highs as investors seized a chance to take profits after the Arab League said a Venezuelan proposal to end the conflict in Libya was under consideration. But prices still found residual support from unrest in the region.
Trichet's remarks on inflation and a possible rate hike pushed the euro sharply higher, above the psychologically important $1.40 level.
This is the type of language that in previous rate hike cycles preceded a rate hike, said currency strategists at Action Economics.
Widespread low interest rates, which have knocked the appeal of other assets such as cash on deposit, have burnished gold's appeal in recent years and helped drive prices to record highs.
VTB Capital analyst Andrey Kryuchenkov said that while a number of factors were still supporting gold, including violence in Libya, any suggestion that interest rates were set to rise was likely to put pressure on the metal.
Due to civil unrest in the Middle East/North Africa region, the downside is still limited, he said. Yet (the ECB comment) is still important, as it gives you a sense of things to come. Rates will have to rise, and currency yields (will be) up, he said.
An earlier retreat in risk aversion had already weighed on gold, pulling prices back from the record $1,440.10 an ounce they hit on Wednesday.
Spot gold has risen by 10 percent in the six weeks since unrest in Tunisia and Egypt spilled into Libya, Yemen, Bahrain and, most recently, Oman and Iran.
Thursday's correction notwithstanding, the situation is still likely to underpin gold prices as analysts are skeptical over the latest news.
I doubt a Chavez-brokered deal would have much impact from a political perspective as he has little legitimacy in the international political sphere, said Cedric Chehab, head of commodities analysis at Business Monitor, a research group.
Silver fell 1.6 percent to $34.13 an ounce after rising to a 31-year high of $34.96 on Wednesday.
Platinum eased 0.6 percent to $1,834.99 an ounce, while palladium lost 0.4 percent at $813.50.