Gold prices fell on Thursday to their lowest level in nearly six months as tight liquidity in the euro zone forced investors to sell the metal, but strong U.S. economic data prompted a stock rally on Wall Street.
The euro initially slid to a 15-month low against the U.S. dollar after a key Italian debt auction failed to ease concerns about the euro-zone debt crisis. It erased losses later - trading flat at $1.2936 - as market sentiment improved and the S&P 500 made it back into positive territory for the year.
World stocks also rose. The MSCI All-Country World index <.MIWD00000PUS> gained 0.56 percent, although it remained down more than 10 percent in 2011.
But gold prices fell more than 1 percent on the day as many investors, facing tight capital market conditions due to the euro-zone crisis, had to raise money to meet their financial obligations. They also fell more than 20 percent from a September high, entering bear market territory.
Concerns about Italy continued to weigh on global markets after its latest debt auction, leaving banks unwilling to lend despite massive capital injections by the European Central Bank.
On Thursday, Italy sold about 7 billion euros in bonds, below its target of 8.5 billion euros. Yields on the 10-year paper fell from a recent high, but remained just under 7 percent - a level seen as unsustainable in the long run.
There's a real worry now that the first quarter could be crunch time in the euro crisis just because of the sheer volume of debt that needs to be rolled over by euro-zone countries, said Standard Chartered strategist David Mann.
Italy has a debt burden of around 120 percent of GDP, and about 150 billion euros in debt coming due between February and April.
Despite gains in stocks, U.S. government debt prices turned higher in thin trade, with investors worried about the European crisis. Benchmark 10-year Treasuries rose 7/32 in price, sending its yield down to 1.8971 percent.
DATA LIFTS WALL ST
U.S. stocks rose after falling more than 1 percent on the previous day, buoyed by data showing pending sales of existing U.S. homes surged to a 1-1/2-year high in November.
Another index showed factory activity in the U.S. Midwest grew more than expected in December. And a third report said that, even as initial claims for unemployment benefits rose last week, the U.S. labour market still seems to be recovering, with the more stable four-week moving average for jobless claims falling to its lowest level since June 2008.
In general, the data has been coming in better than expected, said Steve Goldman, principal of Goldman Management in Short Hills, New Jersey. But the data is still having difficulty propelling stock prices, given the overshadowing
concerns (about) Europe, he added.
Despite Thursday's gains, the Standard & Poor's 500 Index <.SPX> remained only 0.17 percent higher for the year.
The Dow Jones industrial average <.DJI> rose 104.75 points, or 0.86 percent, at 12,256.16, while the Standard & Poor's 500 Index <.SPX> gained 9.72 points, or 0.78 percent, to 1,259.36. The Nasdaq Composite Index <.IXIC> was up 18.03 points, or 0.70 percent, at 2,608.01.
In Europe, the FTSEurofirst 300 <.FTEU3> index of top shares extended gains after the release of U.S. data. The index climbed 0.96 percent to close at 992.78.
Spot gold prices fell 0.34 percent to $1,546.80, after hitting a nearly six-month low of $1,521.94. U.S. crude oil traded at $99.40 per barrel, near Wednesday's settlement price, in a very choppy session.
(Additional reporting by Steven C. Johnson; Editing by Kenneth Barry, Andrew Hay and Chizu Nomiyama)