Gold slipped more than 1 percent on Thursday as losses in other markets, prospects for easing inflation, and worries about central bank sales drove investors to sell bullion to raise cash, undermining the metal's status as a safe-haven investment.
The sharp drop in prices triggered a spate of buying in gold bars, coins and nuggets in Asia, but persistent selling in U.S. bullion futures overshadowed the pick-up in physical demand.
Holdings of the world's largest exchange-traded fund, the
SPDR Gold Trust, dropped to their lowest in three years, as persistent worries over global growth sapped broad investor confidence.
Gold, which has plunged more than 18 percent this year, marked a session low of $1,339.86 an ounce and stood at $1,362.24 by 0418 GMT, down $14.26. Prices were near a 2-year low around $1,321 on Tuesday.
"You can see that sentiment is very fragile, very weak. The downtrend may not be over and U.S. investors have kept selling over the last two days," said Joyce Liu, an investment analyst at Phillip Futures in Singapore.
"If we continue to see this kind of drop, then maybe the physical buying won't be sustained because people will think the price is going to drop further. We may actually see a decrease in physical demand."
U.S. gold futures for June delivery on COMEX fell 2 percent to a session low of $1,335.60 an ounce, dragging down cash gold, silver and platinum group metals.
Gold has ignored tension in the Korean peninsula and investors are increasingly convinced the U.S. Federal Reserve will soon end its bullion-friendly bond buying programme, which could ease inflationary pressure.
The precious metal recorded its biggest ever daily fall in dollar terms on Monday, catching gold bulls, speculators and veteran investors by surprise.
Cyprus' plan to sell excess gold reserves to raise around 400 million euros also led to speculation other indebted euro zone countries could follow suit.
"People think quantitative easing will end this year, which is why there's liquidation on the ETF. It seems most trading is done on COMEX, but I think if prices fail to break through $1,300, people will buy back," said a dealer in Hong Kong.
"Asia is a good buyer of gold this year. Stocks at refiners have suddenly disappeared after prices dropped more than $200, and it takes time to manufacture gold bars. Supply is a bit tight. Premiums will move higher next week."
Premiums for gold bars in Hong Kong were at $1.90 to $2.00 an ounce to the spot prices in London, their highest since early last year. Premiums in Singapore and Tokyo were also at their multi-months highs.
In other markets, risk assets slipped broadly on Thursday, following an overnight drop in U.S. and European equities on fears for global growth.