Gold fell 1.2 per cent on Tuesday as possible sales of a part of more than 3,000 tonnes of gold held by the International Monetary Fund dampened sentiment.
The United States said on Monday it supported the sale of a limited portion of the IMF's gold stocks and was confident Congress would support the move. The US Treasury had earlier resisted seeking Congressional approval
"It is a material development and suggests that it could actually get through. That's a genuine change because the market was assuming otherwise," Stephen Briggs, economist at SG Corporate and Investment Banking, said.
"In itself, it won't be a huge thing but it is definitely something that the market was not expecting. Gold was already overdue a correction after this run and this is a good enough excuse. It has taken steam out of gold for the time being."
Spot gold fell as low as $926.40 an ounce and was quoted at $931.60/932.40 at 10.59am GMT, against $937.80/938.60 in New York on Monday and off last week's record high of $953.60.
The IMF is the world's third largest gold holder, with 3,217.3 tonnes of reserves. Any sale of IMF gold might be done in accordance with a European Central Bank gold accord, which limits total gold sales to 500 tonnes a year, analysts said.
"Despite the agreement to 'limited' sales, traders are likely to interpret the news as negative, given the potential scale of metal that could enter the market," James Moore, precious metals analyst at TheBullionDesk.com, said.
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The physical market was abuzz with activity as gold's fall attracted bargain hunters as well as purchases from jewellery makers, mainly from Indonesia and Vietnam.
Some analysts said the metal has potential to spike again after consolidating its position. It rose 14 per cent this year on the top of 32 per cent gains in 2007.
"Strong buying on dips is likely to be witnessed outweighing temporary liquidations on such news, which are quite common when there are sharp price rises," said Pradeep Unni, analyst at Vision Commodities, referring to IMF gold sales news.
"Gold should trade strong for most of this year, at least till mid 2008," he said in a market note, adding the dollar was expected to remain weak in the near to medium term.
The dollar fell against the euro after a forecast-beating German Ifo business sentiment survey dampened the case for near-term interest rate cuts from the European Central Bank.
A weaker dollar makes gold cheaper for holders of other currencies and often lifts bullion demand. The metal is also generally seen as a hedge against oil-led inflation.
Oil fell below $99 a barrel, as higher demand for winter fuel was balanced by expectations of a build in crude stocks.
In other precious metals, platinum dropped 2 per cent to track falls in gold and as investors booked profit from last week's record highs. Palladium was below a six-and-a-half-year high and silver off its best level in 27 years. (Reuters)
Gold drops 1% on possible IMF sale