Gold stretched its losses into a third session and tumbled below $1,200 an ounce on Tuesday, as easing concerns over the global economy buoyed stocks and hurt safe-haven demand for the metal.
Bullion's three-day loss of more than 4 per cent, its biggest such drop in seven months, takes the precious metal further away from a one-year high reached last week and threatens to undo a rally that has seen prices gain 13 per cent so far this year.
Goldman Sachs's recommendation to short gold, prompted by the bank's belief that the recent fear-induced rally has been overdone, added to the bearish sentiment in the market.
Spot gold fell 1.5 per cent to $1,191.40 an ounce by 0415 GMT, after earlier hitting a session low of $1,190.40. The metal slid 2.3 per cent on Monday, its biggest slump since July. "The (precious metals) complex has benefited from the recent global risk-off attitude and heightened volatility. However, a pull-back was inevitable at some stage," MKS Group trader James Gardiner said.
Gold futures
US gold futures also fell, hitting a session low of $1,191.50. Silver dropped more than 1 per cent. Spot gold may fall more to $1,178, Reuters technical analyst Wang Tao said.
A correction in gold prices had been expected as the metal had risen quickly over a short period of time. It gained $200 from its January lows to its year-high last week, when it also posted its best week since 2011.
On Thursday, gold hit a year-high of $1,260.60 as concerns over the health of the banking sector and fears of a global slowdown prompted investors to steer clear of equities and buy safe-haven gold.
Stocks rise sharply
But world stocks rose sharply on Monday as China's central bank fixed the yuan at a much stronger rate and oil cemented recent gains, easing fears of global deflation. Asian shares extended their gains on Tuesday on a combination of stabilising Chinese markets, a rebound in oil prices and solid US consumption data.
The dollar pulled away from multi-month lows against the yen and the euro, and jumped nearly 1 per cent against a basket of major currencies. "Fears around China, oil and negative interest rates have likely been overstated in the gold price and other financial markets," Goldman Sachs said in a note, adding that it expects gold to fall to $1,100 an ounce in three months.
Top consumer China's return from a week-long holiday did not help either. Chinese investors sold into gold's rally, a sign they do not expect prices to go much higher and cannot be counted on to support the market, with post-Lunar New Year demand set to falter.