Gold bars bearing the hallmark of Chimet SpA, the Italian goldsmith company
Solid investment: Gold’s reputation has been hit

Gold sank to its lowest level since July, hit hard by a strengthening US dollar and economic data that fuelled concerns about a withdrawal of monetary stimulus by the US Federal Reserve.

Bullion fell as much as 2.7 per cent to $1,218 a troy ounce after a key gauge of US manufacturing activity expanded at its fastest pace in two and half years during November.

This week a slew of economic data, including non-farm payrolls for November and third-quarter GDP figures, will provide fresh clues about the health of the US economy. The Fed has said it will start scaling back its $85bn-a-month bond buying programme, which has been a powerful driver for precious metals prices, once certain economic targets are met.

While most analysts expect tapering will start in March a strong jobs report on Friday could change that. “A print above 200k new jobs in November could pull expectations towards December,” said Walter de Wet, an analyst at Standard Bank, who reckons a strong jobs report will trigger further liquidation of gold held in exchange traded funds (ETFs).

Gold has fallen 36 per cent from 2011’s record high in large part because of heavy selling by institutional investors. They have become disillusioned with the precious metal as equities have rallied and inflation failed to accelerate. As a result, holdings in gold-backed ETFs have fallen sharply as investors have shifted cash into the stock market.

Collectively, ETF investors have sold almost 700 tonnes of gold in the first nine months of 2013, equivalent to about a third of global mine production of the metal over the same period. And while the outflows have slowed from levels seen earlier in the year they have not stopped.

“Gold ETF holdings have failed to stabilise and preliminary data for November show outflows of 47 tonnes, a similar pace to October. Total metal held in trust has hit a fresh low since May 2010,” analysts at Barclays noted in a report. “In our view, if equity markets remain firm and if prices breach $1,200 an ounce, the weakness is likely to be exacerbated, given additional holdings become lossmaking.”

In another sign of waning investor sentiment, analysts noted the US Mint had sold 48,000 ounces of American Eagle coins in November, down from 48,500 ounces in October. “Evidently, some buyers still expect gold prices to fall even further and have been exercising restraint when it comes to purchasing coins,” said Commerzbank.

Gold suffered its worst fall in 35 years during November, falling 5.3 per cent on concerns about tapering by the Fed. The metal is down about 27 per cent in the year to date and is heading for its first annual decline in 13 years

Elsewhere, silver hit $19.09 a troy ounce on Monday, its lowest level since July. The metal has dropped 37 per cent in the year to date.

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