(Update 4: Wed 25/06/14 19:53:21)
LONDON/SINGAPORE (June 25): Gold fell on Wednesday, as physical buying dried up after the previous session's rally to two-month highs, while a drop in stock markets on the back of renewed fears over Iraq prompted other investors to cash in gains.
Spot gold was down 0.3 percent at $1,313.90 an ounce at 1148 GMT, while U.S. gold futures for August delivery were down $6.40 an ounce at $1,314.90.
Silver was also down 0.2 percent at $20.83, off the previous day's three-month high of $21.14 an ounce.
Gold hit its highest since mid April on Tuesday at $1,325.90, building on gains made in the previous week after fears the Iraq conflict could escalate and a perceived lack of commitment by the Federal Reserve to raise interest rates prompted a wave of short-covering.
"It looks as though the $1,325 area was where the rally was capped," Societe Generale analyst Robin Bhar said.
"That was quite a run-up for gold, and nothing really warranted it. What bullish catalysts could you have given that investors are not willing to go long? If anything, they want to liquidate into rallies."
Appetite for the metal from retail consumers of physical gold has softened as prices have risen, while Bhar said larger investors may have been prompted to sell by losses in other markets.
"Risk aversion in gold can work either way," he said. "If you have risk aversion in other markets, gold can suffer because it's a liquid asset that can be sold to pay for margin calls in those markets."
European shares fell to three-week lows on Wednesday, mirroring a pull-back on Wall Street and in Asia, as mounting worries over violence in Iraq prompted investors to book profits after a strong run.
The dollar held steady against a basket of currencies meanwhile, with some investors cautious ahead of the final reading of first-quarter U.S. GDP data. It is forecast to be revised down and could boost expectations that the Federal Reserve is in no hurry to tighten policy.
Asian demand soft
Demand for gold was lacklustre in Asia, home of the main consumers of physical metal, with dealers reporting that price-sensitive buyers had been put off by its latest rally.
"People are buying less gold lately, compared with when the price was below $1,300," one physical dealer in Hong Kong said. "After gold crossed $1,300, we saw short covering but after that, there's not much interest. We heard some investors may want to sell back at $1,325 or $1,330."
The head of the state-backed Shanghai Gold Exchange (SGE) said on Wednesday that China must have a bigger influence on the global gold market as the top consumer of the precious metal, as the country targets establishing its own pricing benchmark.
China, along with exchanges in Singapore and Hong Kong, are launching gold contracts this year in a bid to tap a market looking for a viable alternative to the metal's global benchmark that is under regulatory scrutiny.
Spot platinum was down 0.7 percent at $1,450.25 an ounce, while spot palladium was down 0.7 percent at $820.75 an ounce.
Platinum group metals weakened on easing concerns over supply as South African mine workers returned to the Marikana operations of platinum producer Lonmin after wage deals were signed to end a five-month strike.