Yanacocha Mine
Yanacocha Mine in Peru Newmont Mining

(REUTERS) -- Gold prices slid below $1,700 an ounce in Europe on Monday as weaker-than-expected euro zone economic data lifted the dollar versus the euro, and as appetite for assets seen as higher risk, like stocks and commodities, suffered after China set its lowest annual growth target in eight years.

Spot gold hit a low of $1,693.99 an ounce and was down 0.9 percent at $1,697.09 an ounce at 1037 GMT, while U.S. gold futures for April delivery were down $11.20 an ounce at $1,698.60.

Spot prices fell 3.9 percent last week, their worst weekly performance since mid-December, after Federal Reserve chairman Ben Bernanke gave no further hints, in a key speech, of a third round of quantitative easing in the United States.

Markets had really hoped for QE3, and that did create a plunge for gold, because all of a sudden traders and investors abandoned risky assets, we've seen the U.S. dollar strengthening and stock markets (easing), said Peter Fertig, a consultant at Quantitative Commodity Research.

Although extreme risk aversion was a key factor lifting gold last year, at a time when the dollar was strengthening, it has since reestablished its usual inverse relationship to the U.S. unit as investor appetite for the dollar as a safe haven outweighed that for gold, and as panic in the markets subsided.

From a technical perspective, analysts said gold is vulnerable to further losses after last week's rout, particularly if prices break through $1,690 an ounce. Gains in the dollar, which make commodities priced in the U.S. currency more expensive for holders of other currencies, are pressuring the metal.

The U.S. unit strengthened as the euro and growth-linked currencies fell on Monday, undermined by concerns over Greece's progress on completing a huge debt restructuring deal and poor euro zone economic data, although dealers said the dollar was ripe for some profit-taking.

Meanwhile European shares fell as China's move to set its lowest annual growth target in eight years and uncertainty surrounding Greece's bailout prompted investors to sell nominally higher-risk assets. .EU

German Bund futures hit record highs after euro zone services sector PMI data missed expectations and as nerves grew before a Thursday deadline for investors to voluntarily take part in Greece's debt swap deal.

Although immediate wider market pressures and near-term technical factors spell short-term weakness in gold, in the longer run it remains firmly underpinned by the United States' ultra loose monetary policy, portfolio diversification, and strong physical demand from Asia, analysts said.

Negative real interest rates and accommodative monetary policy were and remain the key drivers of investment demand, Morgan Stanley said in a note. Bernanke's testimony did nothing to remove this benefit.

Under these circumstances, QE3 would have been icing on the cake for the monetary easing trade, but not the fundamental driver of bullish investor positioning, it added.


Asset returns in 2012: link.reuters.com/muc46s

Commodity returns in 2012: link.reuters.com/faz36s

Gold correlation with dollar: r.reuters.com/ryx52s

Gold/platinum ratio: link.reuters.com/xez92s



Money managers, including hedge funds and other large speculators, raised bullish bets in gold to their highest in five months in the week of February 28 as prices surged to three-month highs before correcting sharply, according to data from the U.S. Commodity Futures Trading Commission on Friday.

Asian jewelers and other physical gold buyers were still expected to be interested in buying gold at current price levels, which are down sharply from three-month highs around $1,790 hit last week before the sell-off, although the pace of purchasing has slowed from last week's buying frenzy when prices first fell below $1,700.

Gold's fundamental drivers remain intact, but more consolidation is expected in the foreseeable future.

In our meetings last week, factors like the explosion in the balance sheets of the ECB, BoJ, BoE and the Fed and large exports of gold from Hong Kong into China in Q4 were regularly cited as reasons to view gold favorably this year, said UBS in a note. And we heard more mention of rising inflation expectations than we have for some time.

Yet the macro community appears to be engaged in a waiting game, with no one willing to take the first step, it added. Thus it seems the best thing gold can do right now is consolidate in the low $1700s and inspire some confidence that a floor is nearby.

Among other precious metals, silver was down 0.8 percent at $34.15 an ounce. Silver also fell last week, but less dramatically than gold, shedding 2.6 percent. Spot platinum was down 1.8 percent at $1,662.49 an ounce, while spot palladium was up 0.8 percent at $705.50 an ounce.

The gold/platinum ratio, or number of platinum ounces needed to buy an ounce of gold, rose back to 1.02 on Monday, after dipping towards parity on Friday as gold underperformed other precious metals.

Gold is maintaining its historically unusual premium over platinum, although this has narrowed to around $35 an ounce from more than $200 in January.