Gold Slides from Near Four-Week High on China's 'Band-Aid' Measures

Gold prices dipped after hitting a nearly four-week high on Monday, as China's central bank cut reverse repo rates and injected liquidity into markets to help support an economy hit by a coronavirus outbreak.

Chinese authorities pledged to use various monetary policy tools to ensure liquidity remains reasonably ample amid the virus outbreak in Wuhan, which has so far claimed 361 lives.

Spot gold fell 0.6% to $1,579.73 per ounce by 0647 GMT, having earlier touched its highest since January 8 at $1,591.46. US gold futures shed 0.2% to $1,584.30.

"The fact that the People's Bank of China (PBOC) is backstopping (the impact from the virus) is driving gold lower," said Stephen Innes, chief market strategist at AxiCorp.

"... But there'll be a considerable knock-on effect over the longer term, given the fact that 50% of China is shut this week and there will be a drop in production and consumption."

The dollar also firmed against a basket of rivals, making gold expensive for holders of other currencies.

Asian shares stumbled on fears the virus epidemic will hit demand in China.

Investors took stock of PBOC's measures, which included lowering of the 7 and 14 days reverse repo rate to 2.40% and 2.55% respectively, and an injection of 1.2 trillion yuan ($174 billion) worth of liquidity into the markets.

However, AxiCorp's Innes said, "once we get through this 'band-aid effect', the reality will set in that there is an economic tumult about to happen in China, which is going to spread globally and force a lot of central banks to cut rates."

Data showed China's factory activity expanded at its slowest pace in five months in January, which traders said likely did not reflect the early impact of the virus in late January and that the readings could worsen in the coming months.

"There are chances for further economic improvement measures from China, that is the reason gold prices have corrected, though the broad outlook (for gold) is still positive as long as the virus threatens the entire economy," said Hareesh V, head of commodity research at Geojit Financial Services.

Spot gold may seek support at $1,573 per ounce, and then resume its uptrend, said Reuters technical analyst Wang Tao.

Speculators cut their bullish positions in COMEX gold contracts in the week to Jan. 28, data showed on Friday.

Palladium rose 0.3% to $2,284.86 an ounce, silver fell 1.5% to $17.76, and platinum rose 0.2% to $957.92.