Gold fell on Monday as investors sold holdings to raise cash, following last week's rise to record highs, in order to cover losses elsewhere, including European equity markets, which were pushed to 26-month lows by growing fears about the debt crisis.
World shares hit one-month lows after the failure over the weekend of the finance officials of the Group of Seven industrialised nations to come up with anything more than a stated commitment to help turn the global economy around, while fears grew that Greece may default on its debt obligations.
Fears about a Greek default rose last week after senior politicians in German Chancellor Angela Merkel's centre-right coalition started talking openly about it. Greece, meanwhile, confirmed on Monday that it had cash for only a few more weeks.
European benchmark indexes fell by more than 2 percent, dragged down by declines of more than 10 percent in French banking stocks such as Societe Generale, BNP Paribas and Credit Agricole, which have substantial exposure to peripheral euro zone government debt.
Spot gold was last quoted at $1,842.14 an ounce, down 0.8 percent on the day by 1145 GMT, having fallen by more than 1 percent last week, marking its worst weekly decline since late June.
Gold priced in euros rose to a record 1,373.92 euros an ounce as the single European currency hit 10-year lows against the yen and seven-month lows against the dollar .
People always assume that gold does well in times of crisis, but that is not necessarily the case, said Standard Chartered analyst Dan Smith, 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.
The gold price has risen by a third so far this year and by 22 percent in the third quarter alone, its largest quarterly gain since 1986, driven by a push by investors seeking an alternative to sinking currencies and volatile stocks.
Speculators in gold futures raised their holdings last week for the first time since late July, while investors in exchange-traded funds backed by physical metal raised their holdings for the first time last week since mid-August.
The decline in the euro and resulting strength in the dollar have tempered gold in the past two weeks as bullion becomes more expensive to non-U.S. buyers.
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, wrote Edel Tully, UBS precious metals strategist.
While gold is capable of rallying in the face of a strong dollar, an extended upward move in the dollar does put some obstacles in its path.
With the decline in the price of gold from last week's record highs, buyers have emerged in major consuming regions such as Indonesia and Thailand. Buying in India was muted, although demand was expected to pick up as the wedding season approaches.
Gold demand, which dropped in the second quarter of this year, is expected to strengthen by the end of 2011, driven by robust jewellery buying in India and China and recovery in investment demand, senior World Gold Council officials said.
In other precious metals, silver fell by 1.0 percent from Friday's late levels to $40.91 an ounce, while platinum fell 1.0 percent to $1,810.50 an ounce, and palladium fell 0.5 percent to $718.78 an ounce. (Additional reporting by Lewa Pardomuan in Singapore; editing by Jane Baird)