Gold drops as China stimulus bets lift appetite for risk

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Gold fell on Tuesday as the dollar and equity markets rose after data showing China's weakest economic growth in years fanned stimulus hopes, spurring investors towards riskier assets.

The world's second-biggest economy grew 6.8 percent in the fourth quarter, the slowest rate since 2009, the data showed. For 2015 as a whole China's growth came in at 6.9 percent, the weakest in 25 years.

"Gold is drifting lower in response to renewed demand for stocks following the Chinese data overnight," Saxo Bank's head of commodity strategy, Ole Hansen, said.

Spot gold was slightly lower after a lethargic session on Monday when U.S. markets were shut for the Martin Luther King holiday. U.S. gold for February delivery settled at $1,089.10 per ounce, down $1.60.

Bullion had scaled a two-month high of $1,112 on Jan. 8 as investor appetite for risk decreased on renewed concerns about global growth, especially a slowdown in China and whether authorities in Beijing can manage it.

"As long as there is confusion about how China manages exchange rate policy, how they will intervene in the stock market and so on, there will be some safe-haven demand for gold," Danske Bank senior analyst Jens Pedersen said.

"However, even though we have seen a re-pricing of the Fed's rate hike this year (the market doesn't expect a full rate hike before December), we haven't seen much dollar weakness and that's because the market is expecting monetary easing from other central banks."

Gold slid 10 percent last year on fears that higher U.S. interest rates would lower demand for the non-interest-paying asset and continued dollar strength caps gold's upside.

"Most people are in doubt that the worst is over for the metal, even if we have seen futures markets coming from record short at the beginning of the year back to neutral and we have seen a decent pick up in ETF's holdings in the past 10 days," Saxo Bank's Hansen said.

Weak physical demand from top gold consumers China and India has also limited gold's upside potential, analysts said, with Chinese consumer spending dented by its slowing economy.