Gold prices have fallen after weak manufacturing sector data from China reignited worries the world's second-largest economy is heading for a slowdown.
Factory activity in China -- the world's top gold consumer -- fell to a seven-month low in February, a preliminary reading of the HSBC Manufacturing Purchasing Manager's Index showed. The data suggested the country's economy may be cooling off, as the government shifts its focus to slower, but more sustainable growth.
The most-actively traded contract, gold for April delivery, on Thursday closed down $US3.50 a troy ounce, or 0.5 per cent, to $US1,316.90.
Gold prices pared some losses after US data showed consumer prices, which are closely watched by the Federal Reserve as an indicator of economic health, held nearly flat last month. Some investors see gold as a hedge against economic uncertainty and a weaker dollar.
Thursday's Chinese manufacturing data ran counter to numbers released in the past two weeks that showed unexpected strength in the country's economy, despite expectations for a slowdown.
Chinese foreign direct investment rose more than 16 per cent on year in January, the country's Ministry of Commerce said on Tuesday.
On February 12, trade data showed an unexpected surge in both imports and exports last month, another sign of economic health.
Overall, the robust data from China, along with concerns of a flagging US recovery, have helped gold gain more than nine per cent in price this year.
Many investors, however, have taken the positive Chinese data with a grain of salt, acknowledging that they may be prone to distortions. The weakness in the US numbers, on the other hand, has been partially blamed on frigid weather throughout much of the country throughout December and January.
"Gold has been rallying more on hope than on reality," said Frank McGhee, head of precious metals at Integrated Broker Services.
A price drop to around $US1,300 in the gold contract could trigger a round of automated sell programs, as investors would cut their losses, McGhee said.
London PM Gold Fix: $1320.75; previous PM $1327.50
Apr gold $1,316.90, down $3.50; Range $1307.10-$1318.70
Mar silver $21.684, down $0.76; Range $21.40-$21.790
Apr platinum $1,412.50, down $12; Range $1,406.50-$1,417.80
Mar palladium $736.30, up $9.00; Range $728.20-$737.95
