London - Gold edged lower on Monday, extending the previous session's sharp sell-off as confusion over the outlook for U.S. monetary policy weighed on prices, with weak buying from China overnight adding to the weaker tone.
Comments from St Louis Federal Reserve President James Bullard that the Fed could reverse last week's surprise decision to maintain monetary easing at its next meeting helped knock gold 3 percent lower on Friday, erasing gains made in a volatile week.
Spot gold was down 0.4 percent at $1,319.76 an ounce at 0955 GMT, while U.S. gold futures for December delivery were down $12.50 an ounce at $1,320.00.
Prices have fallen more than 20 percent this year, driven largely by hints from the Fed that it may taper its $85 billion monthly bond-buying programme before the end of 2013. Uncertainty over the timing of the move has led to choppy trading.
“Gold has had a stay of execution, perhaps for another month, perhaps for another three months, if the December Fed meeting is used as a platform for (tapering),” Mitsubishi analyst Jonathan Butler said.
“In terms of the data that's coming out of the U.S., again we're going to see positive economic data being bearish for gold and vice versa. With the mixed picture we've seen emerging in the last few weeks, gold could get some temporary support, but once tapering starts, it will see another leg down from here.”
Ultra-loose monetary policy has been a key driver of higher gold prices in recent years, as it keeps up pressure on long-term interest rates, keeping the opportunity cost of holding bullion low, while stoking fears of inflation.
Friday's hawkish comments from Bullard weighed on European shares early on Monday, while a landslide victory in German elections for Angela Merkel supported the euro.
PHYSICAL DEMAND SOFT
Buying in China, which is tipped to emerge as the world's biggest gold consumer this year, was muted as buyers returned after the mid-autumn holiday. Chinese buyers are awaiting further price falls, dealers said.
Gold importers in India hope to clear their old stock held at airports by Tuesday following a meeting with government officials last week, before shipping more for exporters ahead of their peak Christmas season.
Interest in gold-backed exchange traded funds remained relatively soft, with holdings of the largest, New York's SPDR Gold Shares, easing another tonne last week. That has brought its total outflow for the year to 440 tonnes.
Among other precious metals, silver was down 0.9 percent at $21.60 an ounce. The gold/silver ratio, or the number of silver ounces needed to buy an ounce of gold, rose to 61.1, its highest since mid-August, as silver underperformed.
“In our view, the link between gold and silver market selling reflects the long-established gold-to-silver price ratio, the variations of which have historically occurred within a well-defined range,” Morgan Stanley said in a note on Monday.
“In a bullish environment for silver, prices for this metal tend to trade at or below the long-run average of this price ratio, which we estimate at 59.7:1. In bear markets, the reverse is the case.”
Spot platinum was down 0.2 percent at $1,423.50 an ounce and spot palladium was down 0.2 percent at $712.97 an ounce. -Reuters