Gold slides as macro worries lift dollar

Moody's Investor Services warned France's top-notch credit rating could be at risk if the cost of bailing out banks in the euro zone's second-largest economy stretches its budget too much, while a reading of German business confidence fell to its lowest in nearly three years this month.

The Chinese economy expanded at its slowest pace in two years in the third quarter of this year, which compounded fears that growth in the emerging world may be insufficient to offset slowing developed economies in Europe and the United States.

Adding to the anxiety over the euro zone ahead of a key summit on Oct. 23, German finance minister Wolfgang Schaeuble doused optimism over the ability of EU leaders to find a lasting solution to the debt crisis at the meeting, which further curbed investor appetite for risk.

Spot gold was last down 0.8 percent on the day at $1,657.89 an ounce by 0928 GMT. The price hit a record $1,920.30 in early September.

"The problem with all this is it's getting tricky to work out what gold's reaction will be if there was a rescue plan or there isn't a rescue plan or there is a downgrade and so on," said Mitsubishi analyst Matthew Turner.

"The only rational conclusion I can draw is internal factors in the gold market are moving around and establishing a new level for gold. And while that goes on, the price won't move in line with other assets in a normal way," he said.

European stocks fell and the euro came under pressure as hopes faded for an immediate resolution to the crisis, while concern about future demand from top commodities consumer China weighed on industrial metals and crude oil.

German analyst and investor sentiment fell in October to its lowest level in nearly three years, according to a survey from the Mannheim-based ZEW economic think tank.

The monthly poll showed the ZEW's headline economic sentiment index dropped for the eighth consecutive month to -48.3 from -43.3 in September, missing the consensus forecast in a Reuters poll for a decrease to -45.0. This was the lowest level since November 2008.

EURO WORRIES MOUNT

Elsewhere in the euro zone, Portugal on Monday released its draft budget bill for next year, which showed the recession would deteriorate in 2012 and the contraction in growth would be worse than had been expected when Lisbon agreed to the terms of a bailout in May.

In Greece, ships were harboured and trains halted on Tuesday as angry workers built momentum for "the mother of all strikes" expected to bring the entire country to a halt in protest against a new package of tax hikes and wage cuts.

Normally, such events would heighten investor demand for gold, but the strength of the dollar posed an insurmountable headwind for the bullion price, which tends to move inversely to the US currency.

Gold is still set for a near-17 percent gain so far this year, driven by expectations for low interest rates in the United States and by investor demand for perceived safe havens in the face of the turmoil in Europe and rising inflation in the emerging world.

The price of gold also fell in other major currencies including euros, sterling, yen, Swiss francs and Australian dollars, reflecting the breadth of the investor push out of bullion on Tuesday.

However, global holdings of gold staged their first weekly inflow in a month last week, rising to 67.104 million ounces from a 2-1/2 month low below 67 million ounces early last week, indicating that there are still willing buyers.

"So, gold continues in low volume trading with few macro events while market participants are desperately looking for reasons to trade and often in the wrong places," said VTB Capital analyst Andrey Kruychenkov.

"Either way, as far as the broader market is concerned, there would be a coherent rescue plan and boost to the EFSF facility announced ahead of 23 October since policymakers have few options here while the markets would react extremely negatively if expectations are not met. Until then, gold is likely to 'see-saw' with risk sentiment and against the dollar here," he said.

In other precious metals, silver fell by 2.5 percent to $30.99, while platinum fell nearly 1.8 percent to trade at $1,524.74 an ounce and palladium shed 1.9 percent to be quoted at $604.25 an ounce.

Copyright Reuters, 2011