PRECIOUS-Gold falls 1.9 pct as equities gain strongly

Tue May 7, 2013 10:41am EDT

* Gold ETFs holdings fall to lowest since August 2009

* German index hits record highs (Updates prices, adds comments)

By Clara Denina

LONDON, May 7 (Reuters) - Gold fell further on Tuesday as its appeal as an alternative investment faded after equity markets rose on prospects of sustained central bank stimulus, while holdings in exchange-traded funds slipped to their lowest in more than three years.

The metal came under pressure as Britain and Japan returned from a long weekend and looked to assess comments by European Central Bank (ECB) President Mario Draghi on Monday, reiterating the bank was ready to trim rates again if needed. (ID:nL6N0DN2DE]

Meanwhile, Australia's central bank cut rates to a new low of 2.75 percent and suggested it may do more.

Lower interest rates usually favour gold as they encourage investors to put money into non-interest-bearing assets such as the precious metal, but cyclical assets including equities seem more attractive at the moment, analysts said.

"As long as we continue to see stock markets making new highs investors are not in need for alternatives," Saxo bank senior manager Ole Hansen said.

"A break through $1,440 could set some alarms off and trigger a deeper correction towards the $1,400 area."

Gold fell as much as 1.9 percent to a session low of $1,441.11 an ounce, its weakest since May 1. It was down 1.7 percent to $1,443.30 by 1417 GMT. It had risen to a near three-week high of $1,487.80 on Friday.

U.S. gold for June delivery fell 1.7 percent to $1,442.80 an ounce.

World shares hit their strongest in almost five years and Germany's Dax reached an all-time high, on signals top central banks will remain supportive of growth.

Gold plunged to $1,321.35 an ounce on April 16, its lowest in more than two years, after a drop below $1,500 and fears of central bank sales led to a sell-off that stunned investors and prompted them to slash holdings of exchange-traded funds.

The price drop ignited a buying frenzy in Asia and other parts of the world, leading to a shortage of gold bars, coins and nuggets in Hong Kong, Singapore and Tokyo, and helping the metal stage a rebound.

But gold's failure to revisit the $1,500 level suggested that the confidence of exchange-traded fund (ETF) investors in the metal was unlikely to be restored easily.

Investment in ETFs, which allow investors to gain exposure to gold prices without holding actual bullion, has fallen more than 12 percent in 2013 after rising for each of the past 12 years.

ETFs OUTFLOWS CONTINUE

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell a further 0.3 percent to 1,062.30 tonnes or 34.15 million ounces on Monday - the lowest since August 2009.

"The move that we have seen over the past few months where institutional investors have been backing out of gold (ETFs) will probably continue as they don't want to miss out on a good rally (in equities)," Hansen said.

In other precious metals, platinum fell 1.8 percent to $1,474.50 an ounce. Palladium dropped 2.4 percent to $687.22, and silver lost 2.1 percent to $23.49 an ounce. (Additional reporting by Lewa Pardomuan in Singapore; editing by James Jukwey)