Gold slips below $1,300 on fund outflows, China worries

Gold fell below $1,300 an ounce on Thursday as investors cut exposure to gold-backed funds and weighed the impact of Ukraine tensions, while worries over the strength of Chinese demand continued to weigh.

Holdings in the world's biggest exchange-traded fund (ETF), SPDR Gold Trust, fell 8.39 tonnes to 798.43 tonnes on Wednesday - the biggest outflow since late December.

Spot gold slipped 0.4 per cent to $1,298.10 an ounce by 1012 GMT, while gold futures for June delivery fell by the same margin to $1,298.20 an ounce. Thursday's decline extended a nearly 2 per cent fall on Tuesday on fears over slowing demand in top consumer China, after bullion steadied on Wednesday.

"What is rattling gold is talks of how much is being financed with gold in China, which for me is quite bearish because it means that the China's physical demand story is not as strong as it was thought," Societe Generale analyst Robin Bhar said.

A report from the World Gold Council earlier this week said that Chinese firms could have locked up as much as 1,000 tonnes of gold in financing deals, indicating that a big slice of imports has been used to raise funds due to tight credit conditions, rather than to meet consumer demand.

"The comments from Yellen should have lifted gold, but arguably the dollar hasn't weakened as much," Mr Bhar said.

Gold fell at the same time as the dollar, which was down 0.3 per cent against a basket of currencies after Federal Reserve chief Janet Yellen reiterated an accommodative monetary policy stance.

"The comments from Yellen should have lifted gold, but arguably the dollar hasn't weakened as much," Mr Bhar said. Her dovish remarks offset data suggesting that the US economy was regaining momentum. US industrial production rose at a faster-than-expected clip in March, while the US central bank's Beige Book report showed economic activity picked up in recent weeks.

A pick-up in economic growth would encourage investors to gain exposure in riskier assets, rather than buying gold as a form of insurance against risk, analysts said.

Ukraine tensions

Any escalation in tensions between Russia and the West over Ukraine could offer some upside for bullion. Separatists flew the Russian flag on armoured vehicles taken from the Ukrainian army, humiliating a Kiev government operation to recapture eastern towns controlled by pro-Moscow partisans. Foreign ministers from East and West will try to defuse the Ukraine crisis on Thursday in Geneva.

"Safe-haven demand for gold will likely become a feature again in the near term (on Ukraine). But the market remains fickle, and profits are likely to be taken off the table quickly," ANZ analysts said in a note.

Physical buyers are also reluctant to purchase jewellery, bars and coins at current price levels as they see further downside to the metal, traders said.

China has been leading the drop-off in physical demand in Asia. Shanghai prices have been at a discount to spot prices for more than a month on soft demand and a weaker yuan, denting the incentive for banks to import.

Gold prices are likely to keep falling through 2015 after a second annual decline this year as US monetary policy normalises and investors switch to higher-yielding assets, the GFMS team at Thomson Reuters said in a report on Thursday.

Among other precious metals, silver fell 0.2 per cent to $19.59 an ounce.

Platinum gained about 0.2 per cent to $1,432.74 an ounce, and palladium lost 0.3 per cent to $795.75 an ounce.

Copyright @ Thomson Reuters 2014