Gold prices dropped toward $1,220 an ounce on Thursday, caught up in selling of other assets like equities and industrial commodities after U.S. economic data disappointed the financial markets.

The metal is expected to extend its recent gains in the medium term, however, after outperforming most other commodities and all other metals in the second quarter as investors turned to bullion as a haven from risk in the wider markets.

Spot gold hit a two-week low of $1,221.35 and was bid at $1,224.30 an ounce at 1501 GMT, against $1,241.35 late in New York on Wednesday. U.S. gold futures for August delivery slid $20.60 to $1,225.30.

Gold has been caught up in commodity liquidation after poor data and as equities (fall), said Simon Weeks, head of precious metals at the Bank of Nova Scotia.

Usual story -- selling first, as people need cash... and then further down the road, the gold as a currency demand will kick in.

Equity markets in London and New York extended losses on Thursday after data showed a slower-than-expected rate of manufacturing growth in June and a sharp drop in May pending home sales.

The dollar extended losses against the euro, while oil prices also tumbled 4 percent and base metals like copper, zinc and nickel slipped sharply.

Investors are now awaiting key U.S. payrolls data on Friday as an indicator for the next direction of trade.

The labor market report is quite critical because a lot of the recent consumer confidence drop came about because people are concerned about their employment prospects, said Michael Widmer, an analyst at Bank of America-Merill Lynch.

If you do get a slowdown, the picture for some of the cyclical asset classes may be perceived to be not as strong... and that could be quite positive for gold overall.


In the medium term gold is still seen well-supported by the threat of slowing global growth and further financial market instability, after a strong performance in the second quarter.

Many commodities struggled in the second three months of the year as a soaring dollar and doubts about the strength of the economic recovery sapped demand for raw materials.

The benchmark Reuters Jefferies CRB index .CRB, which covers 19 mostly U.S.-traded commodities, finished down about 5.4 percent, its second quarterly loss in a row.

Investment in gold has been solid, with holdings of the world's largest gold exchange-traded fund, New York's SPDR Gold Trust, still at a record 1,320 tons on Wednesday.

Demand for physical bullion in major consumer India was slack, however, as high prices and seasonal factors weighed.

India saw a sharp drop in imports in June, signaling recent record prices are weighing on demand even as the world's largest ETF reported record holdings.

Among other precious metals, silver was bid at $18.02 an ounce against $18.55.

Platinum group metals, largely used in manufacturing catalytic converters, were among the biggest fallers, with platinum down to $1,499 an ounce against $1,531.50 and palladium slipping to $426.13 against $442.

Today's U.S. auto sales data will... be monitored for a possible slowdown in demand, said analyst James Moore.

(Reporting by Jan Harvey; Editing by Sue Thomas)