Gold fell on Thursday as the dollar rose and investors took profits after a widely anticipated European Central Bank (ECB) rate cut, cancelling gains made earlier on a surprise rate cut by China.
The ECB cut its main interest rate to a record low of 0.75 percent and its deposit rate to zero on Thursday to help tackle the euro zone crisis that threatens to push the bloc's deteriorating economy back into recession.
That pushed the euro to a one-month low against the U.S. dollar, which also recovered against the yen after data showed the U.S. private sector added more jobs than expected in June. The dollar and gold usually display an inverse correlation - when one rises, the other falls.
Spot gold was down 0.8 percent at $1,601.20 an ounce at 1326 GMT, falling from a session high of $1,623.80 after China's move.
While lower interest rates are usually positive for gold prices, the ECB decision had been widely expected.
“It's been a case of buy the rumour all week and now probably some profit taking on the announcement,” Societe Generale analyst Robin Bhar said.
China's central bank cut interest rates for the second time in a month on Thursday in the latest attempt to bolster slowing growth in the world's second-largest economy.
Benchmark lending rates will be lowered by 31 basis points to 6 percent, and deposit rates will be reduced by 25 basis points to 3 percent, the People's Bank of China said in a statement on its website.
Bullion is still up 0.4 percent on the week, potentially heading towards its first back-to-back weekly gains since late February.
“Overall, rate cuts by China, the ECB, and the U.S. are all positive for gold, on a slightly longer view than just one day for the simple reason that with inflation where it is, you start cutting interest rates of course then real interest rates get lower,” Walter de Wet, analyst at Standard Bank, said.
“Like many other commodities gold has been struggling under a lack of direction and this might give it a little more impetus. We think gold will go above $1,900 in the last quarter on exactly these reasons,” he said.
Low real interest rates, which strip out the effect of inflation, make gold more attractive to own, given that it bears no yield or dividend that can be eroded by an environment of loose monetary policy. Investors rely on increases in its outright value for a return on their investment.
The Bank of England left rates unchanged and launched a third round of quantitative easing, to the tune of 50 billion pounds.
A report by a payrolls processor that showed U.S. private employers added 176,000 jobs in June topped economists' expectations and could bode well for employment data on Friday.
Friday's monthly jobs report is expected to show 90,000 workers were added to nonfarm payrolls in June and the unemployment rate held at 8.2 percent.
The May report showed the slowest growth in payrolls in a year and revived speculation that the Fed could resort to more asset purchases to anchor borrowing rates to boost the economy, particularly ahead of this November's presidential election.
Softer economic data has put pressure on central banks to take a more accommodative monetary stance to help nurse the global economy back to health.
SAFE-HAVEN
Investment demand for bullion has fallen in recent months on economic uncertainty and has resulted in the dollar emerging as a safe-haven to the detriment of gold.
Holdings of gold in exchange-traded funds, often used as a gauge of longer-term investor demand, have eased this week, but remain less than half a percent off March's record high above 70.89 million ounces.
In India, one of the world's leading consumers of gold, demand for the metal was subdued on Thursday after a drop in the rupee lifted prices during a traditionally lean buying season.
The rest of the precious metals followed gold lower. Silver was down 1.7 percent at $27.61 an ounce, platinum fell 0.4 percent to $1,466.75, and palladium fell 1.1 percent to $585.25. -Reuters