Gold hit three-week lows on Thursday after posting its biggest one-day fall since late January in the previous session, reacting to comments from Federal Reserve head Janet Yellen suggesting U.S. interest rates could rise sooner than expected.
The dollar rose sharply, stocks fell and short-term U.S. bond yields jumped by the most in almost three years after Yellen said the bank may end its bond-buying programme this autumn, and could start to raise interest rates around six months later.
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Gold prices also dropped 1.8 percent. Record low interest rates, which cut the opportunity cost of holding non-yielding bullion above other assets, were a key factor driving the precious metal to all-time highs in recent years.
Spot gold extended losses this morning to $1,325.34 an ounce, its lowest since Feb. 28. It was down 0.3 percent at $1,327.10 an ounce at 1017 GMT, while U.S. gold futures for April delivery were down $13.60 an ounce at $1,327.70.
"Gold was already on the defensive as safe haven bets were closed, and the Fed news added some additional pressure," Saxo Bank's head of commodities research Ole Hansen said. "The market is now busy pricing in higher rates sooner than previously expected, and that could become poisonous for gold."
"The risk related to Ukraine has not gone away, but moved to the sidelines for the time being," he added. "This leaves the metal exposed to long liquidation, not least considering the sharp rise in net longs recently. We are looking for support at $1,322, the trendline from the Dec 31 low."
Concerns that a confrontation over Ukraine could escalate battered stock markets and sent gold to six-month highs at $1,391.76 an ounce earlier this month.
Russia's moves to annex the Black Sea peninsula of Crimea has turned a stand-off with Europe and the United States into the biggest crisis in East-West relations since the Cold War.
Demand for physical gold in China, the world's biggest consumer of the precious metal, was lacklustre on Thursday, dealers said. In the physical market, premiums for gold bars in Hong Kong were unchanged from last week at $1 an ounce to the spot London prices, and at 80 cents to $1 in Singapore.
Domestic gold prices in China remained at discounts to cash gold.
"I've noticed that demand from China has weakened after the Chinese New Year. Although there are imports, I don't think they reflect the real demand. It looks like buyers are just filling the import quotas," said a dealer in Singapore.
"The picture is totally different from last year."
Gold jewellery exports from number two consumer India edged up 1 percent year-on-year in February to $718.36 million, an industry body statement said on Thursday.
Among other precious metals, silver underperformed to fall 1.2 percent to $20.29 an ounce. The gold/silver ratio, which measures the number of silver ounces needed to buy an ounce of gold, hit 65.4 on Thursday, a seven-month high.
Spot platinum was down 0.25 percent at $1,435.99 an ounce, while spot palladium was down 1.1 percent at $753.25 an ounce.
Standard Bank is set to list South Africa's first palladium-backed exchange-traded fund on the Johannesburg Stock Exchange on Monday, the bank said late on Wednesday.