US gold falls 2 percent as Italy fear spooks markets

SINGAPORE: US gold fell as much as 2 percent on Thursday, as growing fears over the stability of Italy and the euro zone sank riskier assets and led to liquidation on the gold market.

The sharp falls in equities and commodities forced some investors to sell their profitable gold positions to cover losses elsewhere, and dragged down prices of precious metals with industrial applications, including silver, platinum and palladium.

Italian borrowing costs reached breaking point on Wednesday after Prime Minister Silvio Berlusconi's insistence on elections instead of an interim government threatened prolonged instability and kindled fears of a split in the euro zone.

But gold's allure as a safe haven is likely to cushion the price fall, with investors seeking to store their value in assets such as bullion and the US dollar during times of economic and political turmoil.

"The relatively modest reduction in gold compared to other commodities is encouraging," said Nick Trevethan, senior commodities strategist at ANZ.

"Given the concerns about Europe, we may see people going back to gold. I don't necessarily think we'll see record highs in the next few weeks, but we could see some cautious gains."

The most-active US gold futures contract lost as much as 2 percent to $1,755.5 an ounce, and recovered slightly to $1,757.70 by 0718 GMT.

Spot gold dropped 0.8 percent to $1,756.19.

Technical analysis suggested that spot gold could drop to $1,740 during the day, said Reuters market analyst Wang Tao.

US silver slumped as much as 2.8 percent to $33.40 an ounce, and spot silver lost 1.4 percent, tracking losses in base metals and equities.

Holdings of the SPDR Gold Trust , the world's largest gold-backed exchange-traded fund, added 3.025 tonnes from a day earlier to 1,267.153 tonnes by Nov. 9, the highest since late August.

The ETF saw an inflow of nearly 24 tonnes so far this month, after an 11.6-tonne gain in October and a slump of more than 30 tonnes in the previous two months, showing reviving interest in gold from investors.

Trading activities on the physical market in Asia were muted, as market participants waited on the sidelines amid uncertainty over the unfolding euro zone debt crisis.

"There was subsided buying from India after the festivals," said a Singapore-based dealer, "Overall the volume was slow and people were hoping for prices to further fall so that they could buy."

The euro steadied on Thursday as most players stuck to the sidelines after a selloff the day before on the spike in Italian borrowing costs, but options positioning suggested more drops ahead as fears of global financial turmoil grip markets.

Copyright Reuters, 2011