Gold trimmed losses after falling as much as 4 percent to its lowest in more than five years on Monday as sellers in top consumer China sold off the metal in minutes, just as bullion's safe-haven status takes a fresh knock from mounting expectations of a U.S. rate hike.
Bullion fell to as low as $1,088.05 an ounce – its weakest since March 2010 – shortly after the Shanghai Gold Exchange opened trading, with volumes soaring to a record level.
"The market looks very technically weak and the biggest buyer of all, China, is now selling gold as opposed to buying it on price dips. That's a recipe for weaker prices," said Victor Thianpiriya, an analyst at ANZ Bank in Singapore.
More than 3 million lots were traded on a key contract on the Shanghai Gold Exchange, compared to less than 27,000 lots on Friday, Reuters data showed. Prior to Monday, the volume for July had averaged less than 30,000 lots.
Spot gold was down 1.5 percent at $1,116.43 an ounce by 0711 GMT, bouncing back above the $1,100 support level.
Thianpiriya said it appeared that sellers took advantage of the low liquidity environment, fueling the speculative selling. Japanese markets were shut for a public holiday.
China said on Friday its gold reserves were up 57 percent at 1,658 tonnes at the end of June from the last time it adjusted its reserve figures more than six years ago.
"This implies stockpiling of around 100 tonnes per year, which is dramatically lower than market expectations," Citigroup analysts wrote.
Gold has breached key support levels since last week as the dollar gained after Federal Reserve Chair Janet Yellen told Congress that the Fed is on course to raise interest rates if the U.S. economy expands as expected.
There were stop-loss orders around the $1,131 an ounce level, said a Sydney-based trader, reflected in a spike in volumes on Comex futures.
"I just feel there's a big push to get gold below $1,100 and then we bounced very quickly," said a trader in Hong Kong.
Dragged down by gold's tumble, platinum lost as much as 5 percent to $942.49 an ounce, its weakest since February 2009, before rebounding to trade at $974.24, down 1.8 percent.
Palladium dropped as much as 3.4 percent to its lowest since October 2012 at $593 before cutting losses to $606, down 1.3 percent.
Spot silver, the least hit among precious metals in Monday's slide, was off 0.5 percent at $14.79 an ounce.
U.S. gold for August delivery was down 1.5 percent at $1,114.50 an ounce, after hitting a session low of $1,080.
