The sell-off from exchange-traded funds (ETFs) continued unabated, with holding on SPDR Gold Trust, the world's largest gold-back ETF, plunging to its lowest since September 2009.
Gold declined by 0.2% to $1,471.79 by 1154 GMT, having rose by nearly 1% on Monday on expectations the US Federal Reserve would keep the pace of its bond buying unchanged at $85 billion a month due to weaker-than-expected US economic recovery. June US gold gained 0.3% to$1,472.10 an ounce.
The dollar strengthened against the euro as a steep fall in euro zone inflation and rising unemployment raised expectations of an interest rate cut by the European Central Bank on Thursday, which would essentially mean more euro will flow into the system. As an haven asset, gold usually shares an inverse relation with the dollar.
Holding on the SPDR Gold Trust dropped 0.22% to 1,080.64 tonnes on Monday, heading for a record monthly plunge of 11.5%. In the physical market, purchases fell on Tuesday as China would be absent from the market until Thursday due to the May day celebrations. However, supplies of gold bars and coins in Asia remained tight, with premiums for gold bars in Hong Kong hitting their peak since October 2011 at $3 an ounce to spot London prices.
Gold prices sank to $1,321.35 on April 16, their lowest in more than two years, after a drop below $1,500 led to a further sell-off that stunned investors and prompted them to keep slashing holdings of exchange-traded funds.
Gold came under pressure earlier this month after debt-hit Cyprus decided to sell reserves to raise around 400 million euros as part of a bailout deal, leading to apprehensions that other struggling euro zone countries could follow suit. However, physical demand, especially in Asian buyers including India, helped gold bounce from a two-year trough of $1,321.35 an ounce hit on April 16.