Gold dropped more than 1% after the US Federal Reserve hiked its discount lending rate to banks, sending the dollar higher and dimming the appeal of bullion as an alternative investment.
But weaker prices could attract buying from the jeweler sector and help gold resist pressure from declines in oil prices, and supply worries after the IMF said it planned to sell more bullion to raise money.
Spot gold was at $1,103.60 an ounce by 6:10 a.m. British time, down $7.80 an ounce, having hit an intraday low of $1,098.55 an ounce. It hovered nearly 10% below a lifetime high above $1,200 an ounce struck in early December.
US gold futures for April delivery fell $14.0 an ounce to $1,104.70. During Asian trade on Friday, gold futures dipped below $1,100 an ounce as the dollar rose to a 9-month high against the euro.
“You have two stimulus measures working against gold here. One is the currency impact, and two is the safe-have aspect which has been a support for gold recently at the expense of a firmer dollar,” said Mark Pervan, senior commodities analyst at ANZ in Melbourne.
“I'd say sentiment is neutral at the moment. You've got pressure from a firmer US dollar but support from, I think, increased risk aversion,” said Pervan, adding that markets were still nervous about a debt crisis in the euro zone.
Debt default worries in Europe, mainly focused on Greece, had pushed investors towards gold, sending the price of bullion in euro terms to a record high above €825 an ounce this week.
Investors use gold as a hedge against financial turbulence and inflation. Gold generally has an inverse relationship with the dollar.
The dollar rallied and the euro hit a nine-month low on Friday after the Fed's move to raise discount rate stoked expectations that it was moving towards tighter monetary policy.
The dollar index rose to its highest in eight months but later trimmed gains after Fed officials said the move was not a precursor to a rise in the benchmark rate and the market was putting too high a probability on a rate increase this year.
“I think we are now looking at a temporary correction to test lower levels,” said Wong Eng Soon, an investment analyst at Phillip Futures in Singapore.
“I am keen to watch the $1,050 level. It was the level which India paid to buy 200 tons,” said Wong, referring to bullion India bought from the International Monetary Fund late last year.
The IMF said it will soon begin phased sales of 191.3 tons of gold to the open market, a move that has called into question demand for bullion from official sector buyers.
The Fund said the sales, which are part of a program launched last year to boost IMF resources for lending, “will be conducted in a phased manner over time” to avoid disruptions to the gold market.
Other markets were hit by the Fed news, with US crude prices falling more than $1 to below $78 a barrel, while Japan's Nikkei share average dipped 2.1%.
The world's largest gold-backed exchange-traded fund, SPDR Gold Trust, said its holdings stood at 1,109.424 tons by February 18, unchanged from the previous business day. (Reuters)