Gold dropped 1 percent on Friday to post its biggest two-week loss in nearly a year, after China tightened bank reserves to rein in inflation and as safe-haven demand faded on a better economic outlook. Gold fell to a one-week low and hovered above its lowest level in two months after China's central bank raised lenders' required reserves for the fourth time in just over two months to fight inflation.
Bullion is used as an inflation hedge and it also benefits from a low interest-rate environment similar to other investments. "China's move of course has consequences for the gold market, but it is not (just) China that is playing a role," said Peter Fertig, a consultant at Quantitative Commodity Research.
Spot gold fell 0.8 percent to $1,361.85 an ounce by 12:22 p.m. EST (1722 GMT), having earlier hit a one-week low of $1,354.99. US gold futures for February delivery slid $27.40 an ounce to $1,359.60. In the first two weeks of this year, gold notched a decline of 4.3 percent, the largest consecutive two-week loss since late January in 2010.
Last week, bullion lost 3.7 percent for its biggest decline since May on signs of an improving economy. Spot silver fell 1.7 percent to $28.19 an ounce. The gold-to-silver ratio - the number of ounces of silver needed to buy an ounce of gold - rose to a one-month high on Friday at just below 48, showing that silver is underperforming gold in a falling market.
Gold prices briefly rallied above $1,390 an ounce on Thursday, its highest this year after an unexpected jump in weekly US jobless claims. "The rally we saw yesterday apparently drew out a few nervous longs who had been waiting for an opportunity to scale back positions," said Ole Hansen, senior manager at Saxo Bank. "It looks like attention (for now) has turned to other markets like stocks and cyclicals."
Holdings of the world's largest gold ETF, New York's SPDR Gold Trust, fell by more than 6 tonnes on Thursday and are down more than 15 tonnes so far this year. Platinum inched up 0.4 percent at $1,807.49 an ounce, while palladium slipped 2.1 percent to $787 an ounce.