Gold fell to its lowest in three months on Thursday on a stronger dollar, worries over a critical euro zone debt situation and a liquidity crisis which is pushing banks to sell assets such as precious metals to raise cash.
The euro fell to its lowest in nearly a year versus the dollar as Italian bond yields fell from recent record highs at auction.
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But cautious investors still demanded a near 7 percent yield to buy 10-year paper, a level seen unsustainable over time for the euro zone third-largest economy. A stronger U.S. unit makes dollar-priced commodities such as precious metals costlier for holders of other currencies.
Gold was on course for a 11 percent fall this month, its biggest drop since October 2008 when the credit crunch hit most financial markets.
A spiralling euro debt crisis and increased need for liquidity in the last few months have pushed banks and other financial participants to sell assets including gold, generally deemed to be a safe haven during economic woes.
"The stress in the banking sector has increases as indicators such as the euro/dollar basis swaps show... There is a shortage of liquidity and, if you have to refinance, you have to sell your assets, including gold," said Credit Suisse analyst Tobias Merath.
"Gold is not a safe haven assets against a liquidity crisis. Banks need to sell assets to raise cash and avoid bankruptcy."
Spot gold fell 1.18 percent to $1,536.80 an ounce by 1043 GMT, from $1,555.19 late in New York on Wednesday.
Earlier it hit a three-month low of $1,534.59.
U.S. gold February futures lost 1.7 percent to $1,538.
Technical analysis suggested spot gold could drop to $1,542 an ounce during the day, said Reuters market analyst Wang Tao.
QUICK REBOUND UNLIKELY
Gold lacked interest from Asian physical buyers, even as it fell to a 3-month through.
Asia's physical buyers have mostly moved to the sidelines of the market as they wait for the new year.
"Many clients are closing for the year already," said a Singapore-based dealer.
A rebound for gold is possible if policymakers take measures such as liquidity injection or interest rates cuts, which could help alleviate the credit crunch and would lessen the necessity to sell assets such as commodities, analysts said.
However a quick turnaround is unlikely in the next few days.
"In the short run, gold remains caught in a macro trap and there is little chance for a yearend rebound in the next two sessions," VTB Capital said in a note.
"Bullion's inverse monthly rolling correlation to the U.S. dollar index continues to hold well over one-year highs, nearing 97 percent yesterday or levels last seen in early October 2010."
Many investors have liquidated gold to buy dollars, which in the current credit climate are seen as the safest assets to own.
Silver was down 1.1 percent at $26.74 an ounce, echoing the weakness in gold.
Platinum was last down 2.3 percent at $1,350.70 an ounce, while palladium was down 1.50 percent at $625 an ounce. (Editing by William Hardy)