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Gold hits 2-1/2 month low as equities, dollar strengthen

By Jan Harvey

LONDON (Reuters) - Gold fell to its lowest in 2-1/2 months on Tuesday, breaking through key support at its August lows as stock markets rose and the dollar hit a one-year high against the euro ahead of a European Central Bank meeting this week.

The metal has been underpinned by worries over the stand-off between Russia and the West over Ukraine and persistent unrest in the Middle East, but strength in stocks and the dollar, plus weak physical demand from China and India, has offset that.

"Gold has struggled for quite some time, balancing geopolitical issues against all-time high stock markets," said Simon Weeks, head of precious metals at the Bank of Nova Scotia.

"Clearly a lot of people already have a hedge on board against the geopolitical scenario, physical (demand) doesn't seem particularly good, China and India just aren't performing in the way people might expect, and the threat of higher interest rates is more likely to encourage producers to be sellers again. It just doesn't look good for the bulls."

Spot gold was down 1.2 percent at $1,271.31 an ounce at 1052 GMT, having earlier hit its lowest since mid-June at $1,268.20. U.S. gold futures for December delivery were down $15.40 at $1,272.00.

Selling picked up after the metal broke through support at $1,273.06 an ounce, its Aug. 21 lows.

European shares rose 0.3 percent on Tuesday as investors await the ECB's policy decision later this week before chasing stocks higher.

Stock markets have rallied recently following dovish comments by ECB President Mario Draghi, which sparked bets that the central bank is preparing to pump more liquidity into the system, possibly via purchases of government or corporate bonds, a measure known as quantitative easing (QE).


Those expectations weighed on the euro, however, pushing it to a one-year low against the dollar, which also hit its highest since January against the yen. Gold tends to move in the opposite direction to the dollar, in which it is priced.

Traders are now awaiting the Institute for Supply Management's report on U.S. manufacturing due later in the day for clues on whether the United States is ready to phase out its quantitative easing just as the ECB considers adopting it.

Among other precious metals, spot platinum was down 0.2 percent at $1,414 an ounce, while spot silver was down 1.1 percent at $19.23 an ounce.

Spot palladium was down 1.8 percent at $887.50 an ounce, after hitting a 13-1/2 year peak the previous day on concerns that unrest in Ukraine could affect supply from number one producer Russia.

European Union governments will take a decision on a package of new sanctions against Russia by Friday, Italian Foreign Minister Federica Mogherini told the European Parliament on Tuesday.

"While there haven't been any metal-related restrictions just yet, disruptions in Russian supply could have a significant impact on the global availability of palladium," ANZ said in a note.

Palladium prices hit their highest compared to platinum since mid-2002 this week, with an ounce of platinum worth 1.57 ounces of palladium. They were at their highest compared to gold in a decade.

(Reporting by Jan Harvey, editing by David Evans)