Gold tumbled to its lowest level since early October on Wednesday, set for its weakest monthly performance since September, as a weak euro and a shortage of dollar funding over the year-end prompted investors to sell aggressively.
Gold has lost about 8.0 percent in value so far this month, on course for its weakest December performance since 2008 and its third-largest monthly sell-off in three years, the point at which the global credit crunch was at its worst.
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The metal's safe-haven status has been called into question given its inability to profit from the high degree of risk aversion and uncertainty current among investors.
Banks' dollar borrowing from the European Central Bank tripled on Wednesday compared to the prior week as the euro zone debt crisis has caused money markets to seize up, aggravating any sell-offs in gold, as investors scramble for dollars ahead of the year end.
Spot gold was down nearly 3 percent on the day at $1,585.49 an ounce by 1610 GMT, its lowest since late September.
The price is set for a 7.3 percent fall this week, its largest weekly slide in nearly three months.
The lure of the dollar as a comparatively secure alternative to the euro, which has pushed local prices for key gold consumers such as India to record highs and deterred buying, together with an investor dash for cash have overwhelmed gold's safe-haven qualities.
"The cash story is very interesting. If you are a commodities investor, there will be some great opportunities over the next couple of months to accumulate again if you're looking further ahead," Ole Hansen, senior manager at Saxo Bank said.
"The super-cycle is nowhere near dead, but right now, it is a question of getting exposure down and coming back in two weeks and seeing where we are," he said.
Volume in the most-active February gold futures contract reached 130,000 lots by 1542 GMT, almost 70 percent of volume for the whole of the previous day, which was the highest so far this month.
The U.S. Federal Reserve on Tuesday warned that turmoil in Europe presented a big risk to the U.S. economy, leaving the door open to possible further steps to boost growth, even though it noted a somewhat stronger labour market.
There has been a clear tendency among investors to hold cash, rather than hard assets, and this has become more evident as the end of the year approaches.
The most recent Reuters asset allocation poll showed global portfolio managers held more cash in November than at any time during at least the last seven years, another of the factors undermining gold's safe-haven properties recently.
HSBC said the lack of a commitment to inject more stimulus into the economy by the Fed was a negative factor for gold, along with a push among investors to get more cash onto their balance sheet, but the bank maintained its positive longer-term view for the bullion price.
"Additionally, some macro hedge funds are liquidating gold holdings and taking profits in a difficult year. As trading volume typically drops toward year-end, we expect increasingly volatile price swings," wrote HSBC analyst James Steel in a note.
"Potential gold buyers may be reluctant to come forward as the year draws to a close. Gold could easily slide through the holidays," he said, noting the resilience of holdings of metal in exchange-traded products, which remain near record highs.
Global holdings of gold in the major ETFs tracked by Reuters remain above 70 million ounces, close to this month's record 70.148 million ounces, as inflows into European funds offset outflows from large U.S. products such as the SPDR Gold Trust , the world's biggest gold-backed ETF.
The amount of gold held in ETFs may be near record highs, and although the gold price is suffering from investors' desire for the safety of cash, the risk of this $116 billion stash of bullion being jettisoned is distant, say analysts.
In other precious metals traded, platinum was last down 3.4 percent on the day at $1,419.74 an ounce.
The platinum price is set for its largest monthly decline since September, down by nearly 6 percent so far in December, in spite of potentially price-supportive reports earlier this week of a sharp decline in platinum mine output in top producer South Africa.
The premium of gold over platinum had reached historic highs above $200 an ounce, indicating gold's outperformance. But with the decline in the gold price this week, this gap has narrowed to around $165 an ounce.
Palladium was last down 6.5 percent at $599.75 an ounce, while silver fell 6.3 percent on the day to $28.82 an ounce