Underground mining machine
Underground mining machine Aurizon Mines

(REUTERS) -- Gold prices fell to a 4-1/2-month low on Monday, hit by concerns about a worsening debt crisis in the euro zone following political deadlock in Greece which fuelled risk aversion and put pressure on the euro.

Spot gold hit a session low at $1,556.61 an ounce, its lowest since December 30, 2011, before recovering slightly to trade at $1,561.10 an ounce at 1323 GMT, down 1.1 percent from $1,578.30 hit late in New York on Friday.

Gold has moved in tandem with riskier assets this year as the turmoil in Europe sent the euro to multi-month lows and investors turned to the safety of the dollar, analysts said.

Gold is under severe pressure. The U.S. dollar is being seen as a safe haven at the moment and as long as the dollar is appreciating against the euro this is clearly weighing on the gold price, said Daniel Briesemann, analyst at Commerzbank.

I wouldn't be surprised if we test the December low of around $1,520 an ounce and if we don't stop here we could go below $1,500.

Concerns about the euro zone crisis resurfaced after coalition talks in Greece hit an impasse on Sunday and Greece's radical leftist leader spurned an invitation from the president for a final round of talks on Monday, all but ensuring another election next month.

The euro fell to its lowest in nearly four months against the dollar, which rose against a basket of currencies. A strong dollar makes commodities priced in the U.S. unit more expensive for holders of other currencies.

Also weighing on sentiment for the precious metal, money managers in gold futures and options cut their net long positions by 20 percent to the lowest level since December 2008, as investors aggressively unwound their bullish bets in the precious metal after a sharp price pullback.

U.S. gold for June slipped 1.5 percent to $1,561 an ounce.

Reflecting risk aversion in financial markets, European shares fell to their lowest levels in four months, while safe haven German bond yields hit record highs. .EU

Investors had turned to gold as a safe haven during the debt crisis last year, sending prices to an all-time high of around $1,920 an ounce. But this year gold is trading more in line as a commodity that moves in the opposite direction to the U.S. dollar.

In our view, recent (gold) market activity is consistent with distressed selling and long liquidation, Morgan Stanley analysts wrote in a note.

Nevertheless, we think gold prices will recover in the coming weeks. The fundamental factors that have driven the gold bull market of late remain very much in place.


Spot platinum fell 0.9 percent to $1,446.24 an ounce, while spot palladium edged up 0.3 percent to $598.72 an ounce. Spot silver fell 1.2 percent to $28.50.

Prices of platinum and palladium are expected to end the year well above current levels, a Reuters poll conducted for Platinum Week showed, as constraints on supply and improving demand tighten the market.

Meanwhile, the global palladium market is seen swinging into a shortfall this year, potentially pushing prices of the autocatalyst metal to nine-month highs, as top producer Russia completes sales of its state stockpile, refiner Johnson Matthey said on Monday.

Market sentiment was also dampened by China's move on Saturday to loosen monetary policy which underscored how Europe's plight is hampering global growth.

The People's Bank of China cut the amount of cash that banks must hold as reserves on Saturday, freeing an estimated 400 billion yuan ($63.5 billion) for lending to add to the roughly 800 billion injected in two previous 50 bps cuts since the government tilted its policy stance towards growth in October.

In the physical market, jewelry makers and speculators took advantage of last week's drop in prices.

We've seen physical buying interest. But people are still bearish about the market because of the strong dollar and worries that Greece won't be able to solve its problems, said a dealer in Hong Kong.

Investors are not so aggressive, and I think the jeweler sector is more important. Supply is a bit tight in the physical market.