Gold fell on Wednesday as a strong U.S. retail sales report boosted optimism about the U.S. economy and after prices failed for a second time to surpass $1,600 an ounce, prompting investors to reduce bullion positions.
The metal rose to within $1 of $1,600 on hopes that the European Central Bank will extend its loose monetary policy following euro zone industrial output data showing a surprisingly big fall in January.
Bullion later turned lower after it failed to break above $1,600 for a second day. The dollar index's seven-month high and gains in U.S. equities also weighed on gold's safe-haven appeal.
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"The failure of prices to break above $1,600 showed that the money managers, who had become buyers, were cautiously bullish," said Carlos Perez-Santalla, commodities broker at PVM Futures.
Gold came under pressure after data showed U.S. retail sales expanded at their fastest pace in five months in February. The report came on the heels of strong gains in employment and manufacturing, increasing chances the Federal Reserve might halt its bond-buying earlier than thought.
Late in the day, the Wall Street Journal, citing people familiar with the situation, said the top U.S. derivatives regulator began internal discussions on whether to investigate the daily fixing of gold and silver prices in London for possible manipulation.
SPDR Gold Trust Declines
Pointing to the drop in a key gauge of investor interest, analysts said investors remained lukewarm towards gold.
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Fund outflows this year of 114.51 tonnes has more than wiped out last year's inflow of 96.25 tonnes.
The next major economic reading comes on Friday with U.S. consumer inflation data. With only a small rise forecast for the February gauge, analysts said there may be little reaction to the report. Investors will also be anticipating any word from officials at next week's U.S. central bank policy meeting.
An exit from its stimulus policy would deal a heavy blow to gold, which has thrived on demand from investors who buy gold to hedge against the inflationary risks of loose monetary policies.
Despite an improving economic outlook, analysts expect the Fed's current $85 billion monthly purchases of mortgage-backed securities and Treasuries to last through 2013 and into 2014.
Longer term, analysts see gold deriving support from central banks looking to diversify away from currencies, a report by the World Gold Council, an industry group, said.