Gold slipped from earlier highs on Tuesday, ending lower as the dollar strengthened and investors looked for further indications that the U.S. Federal Reserve may soon end or taper its economic stimulus program.
Many participants are on hold until Friday's June U.S. employment report offers new insights into economic growth.
The precious metal was higher in early business on short cover buying after ending June with its biggest quarterly loss since at least 1968. But those gains were fleeting as some money managers used the opportunity to sell out of long positions.
"Investors have gradually come to the realization that there is no reason to own the asset class now because at some point interest rates are going to go up and there is no inflation anywhere to be seen," said Troy Gayeski, partner and senior portfolio manager at SkyBridge, which has $7.9 billion assets under management and advisement.
Investors, wary of taking fresh positions before the U.S. Independence Day holiday on Thursday, are looking ahead to Friday's U.S. labor report. A strong reading would lift both U.S. Treasury yields and the dollar, and in turn weigh on gold.
"If numbers are better than expected, selling momentum could kick in again," MKS Capital senior vice president Bernard Sin said.
Gold lost 23 percent in the April-June period after Federal Reserve Chairman Ben Bernanke suggested that the central bank would begin tightening its ultra-loose monetary policy when U.S. economic growth picked up. That would mean rising U.S. interest rates, making gold less attractive.
The dollar rose to a five-week peak against a basket of currencies on a broad view that the Federal Reserve will scale back its stimulus measures sooner than expected given the recent run of generally solid U.S. economic data. [USD/]
Data so far this week show a rebound in U.S. manufacturing and a rise in factory orders, suggesting the sector was stabilizing.
Friday's U.S. non-farm payrolls report will be watched closely, with investors expecting 165,000 new jobs in June and a lower unemployment rate of 7.5 percent.
Some analysts warned that gold's recovery from last week's three-year low at $1,180.70 was not likely to last for long, with some participants anticipating eventual prices declines to $1,000 an ounce.
"The dollar index is strengthening quite a bit, equities are strengthening and you're seeing interest rates go up. That seems to be the perfect storm against the metal," said Phillip Streible, senior commodities broker at R.J. O'Brien in Chicago.
He said that gold's failure to push through resistance near $1,260 per ounce caused other players to join the selling.
ETF Holdings Hit 4½-Year Lows
SPDR Gold Trust, the world's largest gold exchange-traded fund, reported an outflow of 1.2 tonnes to 968.30 tonnes on Monday, its lowest since February 2009. Its holdings have dropped 382.5 tonnes since the start of the year.
Physical demand has not rescued gold as it did in April, when prices fell the most in 30 years. But Shanghai futures were trading at more than a $30 premium to spot prices, indicating some renewed interest.
Commodity market brokers Marex Spectron said there "has been some good physical demand with premiums in Asia remaining elevated ... (showing) that buyers believe that gold has probably done enough on the downside for now."
In Hong Kong and Singapore, however, gold bar premiums remained at the same levels as last week, indicating demand had not picked up strongly.
Silver was down with gold, losing 1.38 percent to $19.29 an ounce. It reached a near three-year low at $18.19 on Friday.