Gold treads water after sharp losses; stimulus worries weighs

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold was unable to recover on Tuesday from sharp losses incurred the previous day, with investors filled with uncertainty over when the U.S. Federal Reserve would begin to taper its monetary stimulus, while physical demand for the metal remained weak.

Gold was boosted last week after Janet Yellen, the Federal Reserve's chief in waiting, indicated she would continue the U.S. central bank's ultra-easy monetary policy. The Fed's $85 billion in monthly bond purchases burnish gold's appeal as a hedge against inflation.

However, on Monday, two top Fed officials from opposite sides of the policy spectrum pointed to improvement in the U.S. economy, adding weight to the notion that the bank is getting close to reducing the pace of its bond buying.

"Markets are just reacting to those stimulus comments because there has been no other significant data and physical demand is failing to provide a floor," said one Hong Kong-based trader.

Spot gold was unchanged at $1,273.91 an ounce at 0310 GMT, after dropping 1.2 percent on Monday.

Asian shares edged to a two-week high denting the metal's safe-haven appeal.

Silver also declined for a second session, hitting a fresh three-month low on Tuesday as some Chinese speculators liquidated holdings.

Chart analysts said gold prices looked set to drop even more.

"Support is at the recent low of $1,261, followed by the $1,251 low from October 15th," ScotiaMocatta analysts said in a note, adding that a breach of the mid-October low would see the metal dropping further to June lows of $1,180.

Investor sentiment continued to remain bearish amid stronger stock markets. SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings fell 1.2 tonnes to 864.51 tonnes on Monday - the fund's lowest since February 2009.

Physical demand, which usually tends to provide a floor for prices at lower levels, failed to emerge in a robust manner even after Monday's price drop.

Demand has lately failed to pick up even below the $1,300 level as consumers had bought a lot of bullion when prices fell earlier in the year.

Dealers said prices now have to drop below $1,200 to see a sharp jump.

(Reporting by A. Ananthalakshmi; Editing by Joseph Radford/Simon Cameron-Moore)