NEW YORK (Reuters) - Gold dropped 1 percent on Friday to notch its biggest two-week loss in nearly a year, after China tightened bank reserves to rein in inflation and as safe-haven demand faded on a better economic outlook.
Gold fell to a one-week low and hovered above its lowest in two months after China's central bank raised lenders' required reserves for the fourth time in just over two months, vowing the fight against inflation would be a top priority.
"China's move is perceived (to show) that the country is capable of slowing down the level of inflation, and that takes some of the run of gold and industrial metals such as silver, platinum and palladium," said Frank McGhee, head precious metals trader at Integrated Brokerage Services.
Bullion is used as an inflation hedge and benefits from a low interest-rate environment.
Spot gold fell 1 percent to $1,359.50 an ounce by 3:22 p.m. EST, having hit a one-week low of $1,354.99. U.S. gold futures for February delivery settled down $26.50 an ounce at $1,360.50.
In the first two weeks of this year, gold notched a decline of 4.3 percent, the largest consecutive two-week loss since late January, 2010.
Earlier this week, Federal Reserve Chairman Ben Bernanke said the U.S. economy should grow around 3 to 4 percent this year, a healthier clip than in 2010, but Fed officials said the economy still needs support from the U.S. central bank even if growth prospects appear firmer.
U.S. data on Friday showed that underlying inflation remained tame, suggesting the recovery was strengthening modestly with little price pressure building, while sales at U.S. retailers rose slightly less than expected in December.
Spot silver fell 1 percent to $28.39 an ounce.
U.S. futures turnover remained stronger than usual, as COMEX gold futures volume totaled one-third above its 30-day average and silver was nearly 30 percent higher, preliminary Reuters data showed.
The gold-to-silver ratio -- the number of ounces of silver needed to buy an ounce of gold -- rose to a one-month high on Friday at just below 48, showing that silver is underperforming gold in a falling market.
On charts, gold prices continued to face headwinds as selling pressure seemed to be reasserting itself after bullion broke below its 50-day moving average this week, said Rick Bensignor, chief market strategist at Dahlman Rose.
Gold briefly rallied above $1,390 an ounce on Thursday, its highest this year after an unexpected jump in weekly U.S. jobless claims.
Safe-haven buying also decreased this week after successful euro zone bond sales lessened worries about the bloc's debt crisis.
The European Central Bank said the euro zone faces short-term price pressures which may linger, showing it could raise interest rates to contain inflation, weighing down on gold buying.
"Investors are moving again out of safe havens into more risky assets, which also weighs on gold," said Peter Fertig, a consultant at Quantitative Commodity Research.
U.S. stocks rose 0.5 percent on stronger-than-expected earnings from JPMorgan Chase & Co. (JPM.N) .N
Holdings of the world's largest gold ETF, New York's SPDR Gold Trust, fell by more than 6 tonnes on Thursday and are down more than 15 tonnes so far this year.
Platinum inched up 0.5 percent at $1,809.49 an ounce, while palladium slipped 1.4 percent to $792.22 an ounce.
Additional reporting by Jan Harvey in London; Editing by Dale Hudson