Investors' thirst for US currency is weighing on the dollar-priced yellow metal
Gold prices eased on Monday, extending the previous week's hefty losses, as a warning from Fitch Ratings that it may downgrade France and six other euro zone countries hurt stocks and the euro and fuelled a dash to the dollar.
Spot gold was down 0.3 percent at $1,594.39 an ounce at 1036 GMT.
The precious metal posted its biggest one-week loss since late September last week, falling to a near 12-week low as concerns over the euro zone debt crisis intensified, boosting the dollar at others assets' expense.
Investors' thirst for the US currency, often seen as a haven from risk, is weighing on dollar-priced gold, which becomes more expensive for holders of other currencies as the unit appreciates.
"You're looking at euro weakness, rather than anything else, as the driving force behind the sell-off," said David Jollie, an analyst at Mitsui & Co Precious Metals. "You've got a stronger dollar and that will tend to lead to lower prices."
Traders with an eye on the end of the year are likely to be loath to add to long positions at this stage, whatever their view of gold prices' longer-term direction, he added.
"Whatever your view, you have to ask what the chances are of making money by the end of the year," he said. "That says to a lot of people that this is not a market to get longer in."
The euro eased towards an 11-month low on concerns that the euro zone sovereign debt crisis would damage global growth, while the dollar also got support on uncertainty after the death of North Korean leader Kim Jong-il.
Though the gold market barely reacted to Kim Jong Il's death, it is sensitive to moves in the wider markets. Gold in recent months has been closely correlated to riskier assets as the funding squeeze forces investors to dump gold to cover losses elsewhere.
The euro was under pressure after Fitch's warning late Friday that it could downgrade France and six other euro zone countries as it believes that a comprehensive solution to the region's debt crisis is "technically and politically beyond reach".
European shares fell, meanwhile, while safe-haven German government bonds rose in early trade.
Managed money in gold futures and options cut bullish bets for a second consecutive week as gold prices fell sharply, the latest data from the US Commodity Futures Trading Commission showed.
"The need/desire to hold US dollars trumped gold's safe haven attributes, as liquidity became the overriding priority for investors and corporates of all kinds," said Credit Suisse in a note.
Demand for physical metal in the world's biggest gold consumer, India, was subdued on Monday as buyers postponed purchases in anticipation of bigger fall in prices, dealers said.
Gold demand in number two buyer China is expected to be firm ahead of the Lunar New Year, but Swiss bank UBS said in a note that imports may not spike as a result, as physical gold is already plentiful in the local market after strong imports earlier in the year.
Analysts say gold may be vulnerable to further losses towards the end of the year and in early 2012, with no end yet in sight to the euro zone debt crisis and some improvement expected in the US economy, which should support the dollar.
However, gold's underlying appeal as a hedge against currency market instability, an official sector reserve asset and a store of wealth in emerging economies is expected to prevent too steep a correction, they add.
Even after last week's correction, spot gold prices remain up 12.3 percent from the beginning of the year.
Among other precious metals, silver was down 2.2 percent at $29.04 an ounce, having fallen nearly 8 percent last week, tracking gold.
Spot platinum was down 0.1 percent at $1,414.74 an ounce, while spot palladium was up 0.4 percent at $620.66 an ounce.