Wholesale gold bullion prices fell to $1,569 an ounce during Monday morning's London trading – 0.9% off Friday's close – as stocks, commodities and the euro also traded lower and US Treasuries gained, following news that two Spanish regions plan to ask for bailouts.
Silver bullion fell to $26.88 an ounce – a 1.9% drop on where it ended Friday.
Volumes of gold bullion held by exchange traded funds (ETFs) saw net losses last week, while on the currency markets this morning the euro hit a new two-year low against the dollar Monday, dropping below $1.21. As a result, the US Dollar Index, which measures the dollar's strength against other major currencies, hit a new two-year high.
"The great danger for the gold price is the stronger dollar, because of its long-term negative correlation to gold," says Eugen Weinberg, head of commodity research at Commerzbank.
"That's definitely still dampening the interest of investors from the United States...but in euro terms, gold is trading near six-month highs...it's more about dollar strength than gold weakness."
European stock markets sold off sharply this morning, with the Euro Stoxx 50 index of blue chip companies down around 2.5% by lunchtime, and Spain's Ibex down 5.3%.
Yields on 10-Year Spanish government bonds meantime set a new euro-era record Monday, rising above 7.5% following news on Friday that Valencia's regional government will ask Madrid for a bailout. On Sunday, the Spanish region of Murcia said it too will seek aid, with newspapers reporting several other regional governments plan to make similar requests.
Spain's biggest region, Catalonia, is "working very hard to pay bills normally", its economy minister Andreu Mas-Colell told Italian newspaper La Repubblica.
"But the pressure on our treasury is very high because the markets are closed [to us]."
Elsewhere in Europe, officials from the European Commission, European Central Bank and International Monetary Fund – collectively known as the 'troika' – are due to visit Athens tomorrow to assess progress meeting bailout conditions.
"If Greece doesn't fulfill those conditions, then there can be no more payments," German vice chancellor Philipp Roesler said Sunday, adding that the idea of Greece leaving the euro "has long ago lost its terror".
"There is no firewall around Greece," counters Paul Donovan, senior economist at UBS.
"Or, if there is, it is constructed of high quality, dry kindling wood doused in gasoline. If Greece goes other countries seem certain to leave...if politicians have lost a sense of terror over the prospect of a Greek exit it suggests that politicians have lost any comprehension of economic reality."
In New York meantime, the difference between bullish and bearish contracts held by noncommercial gold futures and options traders – the so-called speculative net long – rose slightly in the week ended last Tuesday, Commodity Futures Trading Commission figures show. The number of speculative long and short positions both fell however.
"Overall positioning in gold remains weak," says a note from Standard Bank.
"We are skeptical about the sustainability of any gold rallies over the short term."
The world's biggest gold ETF the SPDR Gold Shares (GLD) saw a second straight day of outflows on Friday, sending holdings of gold bullion down to 1254.6 tonnes, just above where they were six months ago.
"A lot of fund managers are just content sitting on cash without loading up on anything at all," adds one trader in Singapore.
"They are happy to be in as stable a portfolio as possible."
"Evidence of a significant response from physical buyers is needed first," says a note from UBS, "before the investment community can be expected to follow suit."
UBS adds that its gold sales to India "do not indicate any improvement as yet and neither does combined gold volumes on the Shanghai Gold Exchange, which have been 30% below average this month."
India needs to see a "social and cultural revolution" in its attitude towards gold, according to the deputy governor of the central bank.
"Ninety percent of the gold demand is jewelry or to offer to God," KC Chakrabarty told an audience in Mumbai over the weekend.
"Both have to stop... Wearing gold as an ornament was a culture when you were a rich society, when you were contributing to 30% of the GDP of the world. Today, we have become a poor country, we need to change our culture."