By Jan Harvey
LONDON (Reuters) - Gold prices hit their lowest since early July on Tuesday after U.S. data fuelled expectations that the Federal Reserve is set to taper its monetary stimulus, curbing investment interest in the precious metal.
Data released on Monday showed the ISM gauge of U.S. factory activity hit a 2-1/2-year high in November, potentially bringing the Fed closer to scaling back its huge quantitative easing programme, a move that would support the dollar.
It would also weigh on gold by relieving pressure on long-term interest rates while potentially dampening expectations that inflation will rise in years to come.
Spot gold slid to a five-month low at $1,215.60 an ounce and were down 0.1 percent at $1,219.00 an ounce at 1519 GMT. U.S. gold futures for February delivery fell $3.20 an ounce to $1,218.70.
"It's still the fear of tapering (that's driving gold)," Peter Fertig, a consultant at Quantitative Commodity Research, said. "It is more likely to happen in the first quarter than in December, but nevertheless the market is nervous that the Fed will taper soon."
"Gold is not making any headway because of those fears."
Investors have heavily sold gold in 2013, with holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Shares, plummeting more than 500 tonnes this year to their lowest since January 2009.
"Sentiment remains bearish, and larger players choose to stay away for now," Andrey Kryuchenkov, an analyst at VTB Capital, said. "Given QE uncertainty, why would you want to boost your gold holdings?"
"The opportunity cost of holding gold will only increase from here, while subdued inflation and reduced macro risks make its safe-haven or inflation-hedging properties obsolete."
GRAPHICS:
2013 asset returns: http://link.reuters.com/dub25t
2013 commod returns: http://link.reuters.com/reb25t
Gold/USD correlation: http://r.reuters.com/ryx52s
Gold across currencies: http://r.reuters.com/wun62s
PHYSICAL BUYING SOFT
Dealers said buying by consumers in Asia, the world's biggest market for physical gold, increased on Tuesday due to the sharp overnight drop in prices, but many consumers remained on the sidelines as they expected prices to go even lower.
In China, the largest buyer of bullion, premiums of 99.99 percent purity gold climbed to about $11 an ounce from $7 on Monday on the Shanghai Gold Exchange, still far short of the $30-$40 levels seen in April-May.
"There has been a fair amount of inventory build, I suspect particularly with the local banks," Philip Klapwijk, managing director of Hong Kong-based metals consultancy Precious Metals Insights, told the Reuters Global Gold Forum on Tuesday.
"These bank, and to a lesser extent trade, stocks are curtailing demand in Q4 to date. You can see this from the lack of response to the major drop in gold prices lately. Premia have not moved up really much at all."
Data from the U.S. Mint showed its sales of gold American Eagle coins fell to 48,000 ounces last month from 136,500 in November 2012, while the Perth Mint's November sales of gold bars and coins dropped by nearly a third.
U.S. Mint sales of American Eagle silver coins in November fell 27 percent year-on-year.
Silver was down 0.6 percent at $19.01 an ounce, while spot platinum was up 0.7 percent at $1,347.49 an ounce, and spot palladium was up 0.4 percent at $711.50 an ounce.
(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Dale Hudson, Jane Baird and David Evans)
