Gold drops 1 percent on China return, rebound in stocks

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold dropped 1 percent on Monday, falling for a second straight session after hitting its highest in a year last week, dragged down by a rebound in stock markets and selling from China after the Lunar New Year holiday.

Bullion had climbed to a year-high of $1,260.60 on Thursday as turmoil in global equities stoked safe-haven demand for the metal, along with the Japanese yen and U.S. Treasuries.

But Asian shares bounced to snap a five-session losing streak on Monday, with Shanghai stocks posting only modest losses after a week-long holiday, following a rebound in U.S. and European stocks in the previous session.

Spot gold fell to a session low of $1,221.40, before paring some losses to trade down 1 percent at $1,223.79 by 0311 GMT. It dropped 0.7 percent on Friday.

U.S. gold futures dropped as much as 1.4 percent to $1,222.20.

"Gold is lower because of the good bounce in equities and the Chinese selling," said a Sydney-based trader. "There is some profit-taking around but volumes haven't been huge."

Gold is about $60 an ounce higher than Februray 5, when Chinese markets were last open, prompting them to take profits.

Other Asian markets have also shown little interest in the yellow metal as a sharp rise in prices over a short period of time has put off buyers.

"If financial markets continue to stabilize gold is likely to correct further," HSBC analysts said in a note.

Reuters technical analyst Wang Tao said gold may test support at $1,219, with a good chance of breaking below that level and falling more towards the next support at $1,178.

Western investors have been more bullish about gold.

Last week's rally spurred a buying frenzy for U.S. bullion coins as small and large investors bet that volatile currencies and global economic concerns would lift its value even higher.

Hedge funds and money managers boosted bullish bets in COMEX gold futures and options in the week to Feb. 9 ahead of the bullion market's biggest daily rally in years, U.S. Commodity Futures Trading Commission data showed on Friday.

Assets of SPDR Gold Trust, the top gold-backed exchange-traded fund, fell 0.71 percent to 710.95 tonnes on Friday, but the fund had seen sharp inflows before that.

PRICES AT 0311 GMT

Metal Last Change Pct chg

Spot gold 1223.79 -13.87 -1.12

Spot silver 15.386 -0.324 -2.06

Spot platinum 946.17 -5.07 -0.53

Spot palladium 516.5 -2.97 -0.57

Comex gold 1223.7 -15.7 -1.27

Comex silver 15.42 -0.37 -2.34

COMEX gold and silver contracts show the most

active months

(Reporting by A. Ananthalakshmi; Editing by Joseph Radford)