Gold falls as stocks hold firm; physical demand stays strong

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold fell on Tuesday as Asian stock markets and the dollar firmed after a turbulent week, undermining the metal's appeal as a safe haven and prompting more selling in bullion-backed exchange traded funds.

Demand in the physical market continued to hold prices near $1,400 an ounce as the recent drops in the spot market lured buyers to invest in bullion.

Spot gold fell 0.26 percent to $1,390.71 an ounce by 0230 GMT, after gaining more than half a percent on Monday. It rose 2 percent last week - its strongest weekly percentage gain in a month - though the metal is down 17 percent for the year.

U.S. gold rose 0.22 percent to $1,389.60.

"The paper market is dropping but we are seeing a different story in the physical market," said Zane Lim, regional manager of operations at Singapore-based dealer BullionStar. "Everybody is buying and no one is selling."

Bullion is being sold at high premiums compared to spot prices as there is not enough supply in the market to meet the strong demand.

"We are not seeing any signs of slowing down. People are still thinking it is a good price to go in at," Lim said, adding that most of the bullion dealers in Singapore were sold out.

Gold prices remain near a two-year low of $1,321.35 hit in mid-April as investors flock to higher-yielding stocks.

Holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, are at their lowest since mid-February 2009, falling 0.24 percent to 1,016.16 tonnes on Friday. The fund held 1,350.50 tonnes of gold at the beginning of 2013.

Russia, Turkey and Kazakhstan were among central banks buying gold in April to diversify their strategic portfolio, data from the International Monetary Fund showed on Monday.

Demand in India, the world's biggest gold market, was subdued as the peak wedding season cools off, and its central bank is taking more steps to curb gold purchases.

On Monday, the Reserve Bank of India said banks would not be allowed to give loans against units of gold exchange-traded funds and gold mutual funds.

(Reporting by A. Ananthalakshmi; Editing by Tom Hogue)