SAN FRANCISCO (MarketWatch) — Gold futures dropped Wednesday to their lowest settlement level since late June, as signs of weakening demand for the so-called paper form of the metal offset safe-haven support from a slowdown in growth among U.S. private payrolls in March.

The selling in the largest gold-backed exchange-traded fund GLD, +0.28% “has created a scenario of liquidation in the gold market — putting pressure on price of gold and counterbalancing what physical demand there is,” said Jeffrey Wright, managing director at Global Hunter Securities.

Gold for June delivery GCM23, fell $22.40, or 1.4%, to settle at $1,553.50 an ounce on the Comex division of the New York Mercantile Exchange. That was the lowest settlement for a most-active contract since June 28, according to FactSet data.

The losses for gold futures came as shares of the SPDR Gold Trust fell 1.5% in afternoon dealings. They’re down over 7% year to date.

Holdings of gold in the ETF fell to 38.9 million ounces Tuesday — down from 39.1 million on Monday. They were at 43.4 million ounces on Jan. 2.

Shares of the iShares Gold Trust IAU, +0.26% also fell by 1.5% Wednesday afternoon.

SPDR Gold Trust is a physical trust, backed by actual gold ounces purchased when investors buy the ETF, said Wright. “This has created a surge in physical demand over past few years. The opposite can/is now true — with selling pressure, this releases supply of physical ounces into an already soft market.”

A disconnect

“There is a clear disconnect between the paper and physical market,” said Jan Skoyles, head of research at The Real Asset Co., a precious-metals investment platform provider.

Physical buying remains strong, but “those in the paper market look at this on a day-by-day basis and today gold doesn’t look as attractive as other asset classes,” she said. “Those interested in physical gold continue to buy, but expect the gold price to drop further and so are hanging back until it does so.”

Analysts have said that ETFs have transformed the gold market following the introduction of the world’s first gold-backed ETF GOLD, +0.29% , launched in Australia a decade ago.

For now, “demand for protection of wealth is ... not there so things don’t look too bright for the white metal,” said Fawad Razaqzada, technical analyst at GFT Markets, in a note.

At the same time, however, “demand for the metals in the physical form is there — as highlighted by reports that Turkey’s imports of silver surged more than 30% and that of gold climbed to an eight-month high in March,” he said, adding that central banks remain significant physical buyers.

For now, gold ETF investors are “shunning gold and opting for other non-gold based assets” given the overall, underlying strength of the U.S. economy, said Chintan Karnani, an independent bullion analyst based in New Delhi. Investors are much more optimistic on the U.S. economy than they have been over the past four years.

Supportive factors

Gold prices had temporarily pared losses after data on private-payrolls growth showed a slowdown in March, helping to buoy the precious metal’s safe-haven appeal. Automatic Data Processing Inc. posted the smallest gain in growth since October.

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Analysts said that the gold market, however, awaited the government’s jobs report, which will be released Friday. It includes information on both private and public-sector payrolls.

On Tuesday, gold prices fell $25 to settle at $1,575.90 an ounce, the lowest settlement level for a most-active contract since March 7.

The precious metal was hurt by the greenback’s strength against the euro EURUSD, -0.20% following disappointing data from Europe, including contraction in the euro-zone manufacturing sector in March.

On Wednesday, the dollar weakened against most of its currency rivals, including the euro. Weakness in the dollar usually provides support for dollar-denominated commodities such as gold as it makes them cheaper for holders of other currencies to buy. That apparently wasn’t enough to support gold against the session’s price pressures.

The ADP private-payrolls data weighed on the dollar, along with a slowdown in business for U.S. service-sector companies in March reported by the Institute for Supply Management.

“ It’s ‘just a bad day at the office for commodities and precious metals across the board.’ ” — Tim Murray, Johnson Matthey

Remaining under pressure Wednesday, silver futures for May delivery US:SIK3 lost 45 cents, or 1.7%, to $26.80 an ounce. That was the lowest settlement for a most-active contract since late June, according to FactSet data.

May copper futures HGK23, shed nearly 5 cents, or 1.4%, to $3.33 a pound. July platinum US:PLN3 fell $32.30, or 2.1%, to $1,541.90 an ounce. June palladium US:PAM3 shed $13.95, or 1.8%, to $755.45 an ounce.

For platinum and palladium, it seems to be a “risk-off” day today, despite the positive auto sales numbers, said Tim Murray, general manager of precious metals marketing at Johnson Matthey. “Just a bad day at the office for commodities and precious metals across the board.”