Gold drops on fresh stimulus fears, weak buying from China

By A. Ananthalakshmi SINGAPORE (Reuters) - Gold fell on Monday after sharp losses in the previous session on renewed fears that the U.S. Federal Reserve will begin tapering its bullion-friendly stimulus measures later this year. Weak buying from major consumer China, which was back from the mid-autumn festival holiday, also weighed on prices. After a surprise decision by the Fed last week to stick to its bond-buying stimulus, St. Louis Fed President James Bullard said on Friday that the U.S. central bank could still scale back the stimulus at an October meeting should data point to a stronger economy. Gold, often seen as an inflation-hedge and a safe-haven investment, is highly sensitive to the fate of the stimulus which propelled it to record highs in 2011. A Reuters poll of economists showed that many expected the Fed to taper bond purchases only in December. Forty-two of 61 economists said the Fed would now taper in December, the last chance for policymakers to follow through on Fed Chairman Ben Bernanke's earlier guidance. "The Fed will not reduce immediately considering they downgraded their views about the economy in the (September)meeting," said Chen Min, precious metals analyst at Jinrui Futures in Shenzhen. "The next possible window is in December." "Because of the risk that has increased recently, investors in the gold markets should focus on holdings in exchange traded funds and speculative holdings to understand market thinking." Spot gold was down 0.3 percent to $1,321.56 an ounce at 0253 GMT, after a near 3 percent drop on Friday. U.S. gold futures fell as much as 1.4 percent, while silver futures dropped 2.9 percent. Traders said silver fell sharply due to technical selling. Strong China PMI data, which usually provides some support for the metal used for industrial purposes, failed to lift prices. Hedge funds and money managers slashed bullish bets in futures and options of U.S. gold and silver markets, a weekly report by the Commodity Futures Trading Commission showed on Friday. Holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 0.2 percent, or 1.81 tonnes, to 910.19 tonnes on Friday - not too far from its four-year low. WEAK CHINA Traders in Hong Kong and China said there was not much buying interest from China, the second-biggest gold consumer after India. "We can see some buying interest from them only if prices fall below $1,300 and stay above $1,250," said one dealer. In India, importers were set to start buying gold again after a two-month gap as the government and banks agreed on how new rules on imports should work, easing prices in the domestic market and helping supplies just as seasonal demand kicks in.