Gold Settles Above $1,277; Investors Flee China Troubles

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Gold settled lower on Monday, extending last week's 7 percent slide as fears of a cash crunch in China spooked investors, and a slide in U.S. equities prompted some to liquidate bullion to cover margin calls.

U.S. gold futures for August delivery fell $14.90 to at $1,277.10 an ounce, with trading volume on track to finish below its 30-day daily average, preliminary Reuters data showed.

Other precious metals including silver and platinum group metals fell at least 2 percent on global economic fears. Gold hovered about $10 above a three-year low reached last week.

Earlier in the day, the S&P 500 index, a U.S. equities benchmark, initially dropped 2 percent on worries about the U.S. Federal Reserve's plan to end economic stimulus, and about a cash squeeze in China that could hurt the world's second-largest economy. However, stocks sharply pared those losses in midday trading, as investors hunted for bargains.

Investors Slash Bullish Bets

On Friday, bullion holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell a further 0.5 percent to the lowest in more than four years. Analysts said physical buying of gold has not been enough to offset fund selling of gold exchange-traded products.

"Physical demand had previously absorbed the excess supply from disinvestment but ETP outflows could gain momentum from here. Much of the physical buying seen in April is unlikely to materialize again," said Suki Cooper, precious metals strategist at Barclays Capital.

Spot gold was down 0.9 percent to $1,285 an ounce. Bullion posted its worst weekly performance last week since September 2011 pushed the price as low as $1,268.89. It is down 24 percent so far this year.

The dollar traded near its highest in nearly three weeks against a basket of currencies. Last Wednesday, Fed Chairman Ben Bernanke gave his most explicit signal yet that the U.S. central bank was considering scaling back its $85 billion monthly mortgage-backed bond purchases.

China's Cash Squeeze

The S&P 500 was down 2 percent on Monday as Chinese equity markets plummeted after the People's Bank of China said banks needed to do a better job of managing cash as the PBOC attempts to move China away from credit-driven investment.

Interest rates for short-term funds in China rose to extraordinary levels last week after big commercial banks held back on lending in the interbank market. The Fed's remarks helped push up the benchmark 10-year U.S. Treasury yield to its highest in almost two years at above 2.5 percent.

The rise in the yields from U.S. government bonds and other fixed-income products is weighing heavily on gold which pays no interest and tends to be ultra-sensitive to changes in interest-rate expectations. Also weighing on precious metals were news that Goldman Sachs cut its year-end 2013 gold price forecast to $1,300 an ounce from $1,435, while UBS lowered its 2013 outlook for silver to $24 an ounce from $29 previously.

Among other precious metals, silver fell 2 percent to $20 an ounce, having reached a near-three year low of $19.35 last week. Platinum fell 3 percent to $1,335 an ounce and palladium was down 2 percent to $660 an ounce.