Gold closed lower Monday after investors sold their holdings in the yellow metal to generate cash, while others took profits and a third group bought the surging U.S. dollar as a safe haven.
Both a rising U.S. dollar -- which reached its highest level in six months against a basket of six major currencies -- and falling crude oil prices tend to weigh on gold prices, which hit a high of $1,923.10 per ounce last week.
Besides the dollar and crude oil, investors went to their gold assets to cover heavy losses in stocks. The DAX 30 was down 3.9 percent and the FTSE 100 was off 2.6 percent, both of which were down on a growing sense among some observers that Greece must either default or leave the eurozone, or both.
People always assume that gold does well in times of crisis, but that is not necessarily the case, Standard Chartered analyst Dan Smith told Reuters, citing gold's 28 percent drop from the highs of 2008 to the lows of that year.
Gold is held as part of a wider portfolio of assets, so when you see blanket selling of equities, then gold will come down at the same time. Having said that, of course, it has tended to do well on worries about Europe and currency strength, but the wider picture needs to be taken into account, so that is why gold is struggling at these higher levels.
Gold on New York's futures market closed down $46.20 to $1,813.30, a 2.5 percent decline. Gold for immediate delivery ended down $58.21 at $1,804.61.
Silver on New York's futures market closed down $1.41 to $40.217, a 3.4 percent decline. Silver for immediate delivery ended down $1.54 or $39.91.
Despite the downturn in precious metals, the week's prospects look positive.
As the week begins gold should benefit from the scaling back of risk appetite on what appear to be rising fears of a Greek default, contagion to the rest of the periphery, and the impact on banks, UBS strategist Edel Tully said in a note.
The actions of rating agencies will be watched, with newswires reporting that Moody's stands ready to downgrade the biggest French banks because of their Greek exposure. The lack of coordinated policy action from the weekend G7 meeting may also limit risk appetite. This all seems gold-positive, but the red flag is that the euro selloff is leading to a safe-haven dollar rally.