Gold prices fell by 1.7 percent to their lowest this month in Europe on Tuesday as a stronger dollar prompted speculators to offload long positions, traders said. The fall came despite oil prices moving above $68 a barrel as firms assessed damage wrought by Hurricane Katrina's rampage through the Gulf of Mexico.
Some investors buy gold bullion to hedge against potential inflation when oil prices soar.
By 1458 GMT spot gold was at $429.70/430.50 a troy ounce, down sharply from late levels in New York on Monday of $435.40/436.15 and near a four-week low of $429.00.
"The funds tried to take it higher through $440 yesterday on the back of oil...but they've been the only game in town for so long now," Simon Weeks, director of precious metals at ScotiaMocatta, said.
Bullion's tumble picked up speed shortly after the New York gold futures market opened, when a wave of selling triggered automatic sell orders to stop losses.
Spot gold hit a new peak for the year at $449.30 just over two weeks ago as speculators flooded back into the market.
Data released last week showed they were holding on to their sizeable net long position of around 20 million ounces as of August 23.
"We expect this large net speculative position to leave gold extremely vulnerable to more long liquidation, and near-term price risks are skewed to the downside, though this is of course dependent on (euro/dollar) movements," Barclays Capital said in a weekly commodity investor report.
Weeks said prices could move quickly back down below $420 if the market failed to close above its 100-day moving average at $429.50.
The dollar extended gains after a report showed US consumers were much more confident than anticipated in August despite rising fuel costs.
The euro initially slipped to around $1.2175 from around $1.2194 shortly ahead of the report, before rallying.
Silver fell to its lowest in 6-1/2 months as funds continued to sell the metal. Traders were looking for the metal to shift back down towards $6.40-6.30 if the current wave of speculative liquidation continued.
Spot prices were at $6.68/6.71 an ounce, down from New York's previous $6.72/6.75.
Platinum fell to $887.00/890.00 from $897.00/902.00, while palladium was barely changed at $182.00/186.00 versus $183.00/188.00.