Gold fell to a one week low on Thursday as fears that the euro zone debt crisis could spread from peripheral to core economies kept investors nervous and prompted some to liquidate profitable positions to cover losses in other asset classes.
The cost of insuring French and Spanish 5-year government debt against default rose to record highs and the spread between French 10-year government bonds and their German equivalents jumped to a fresh euro-era high on concerns the debt crisis was deepening and spreading to the larger euro zone economies.
A spat between France and Germany on Wednesday over whether the European Central Bank should intervene more forcefully to halt the euro zone's accelerating debt crisis raised doubts about the Euro leaders ability to find a solution.
There is a bit of general risk-off across the markets as we wait for further developments of the Euro zone crisis, a bit of currency influence and a bit of opportunity as certain people try to crystallize their gains, said Nick Moore, an analyst at RBS Global Banking & Markets.
We know one or two big funds have been exiting, having had very good profits...The gold market itself is in very good form though; there is nothing wrong with fundamentals, Moore said.
Spot gold edged down 1.32 percent to $1,739.59 an ounce by 1457 GMT (9:57 a.m. ET), from $1,762.29 late in New York on Wednesday.
Weighing on gold, the dollar rose against a basket of currencies.
A stronger U.S. currency makes dollar-priced commodities such as precious metals costlier for holders of other currencies.
Gold has confounded market watchers by refusing to behave like a safe-haven and instead has tracked equities over the past few weeks, but the escalating European debt crisis could see bullion ditch its risk-asset mantle and return to record highs.
Analysts said that the long-term outlook remains solid for gold, as physical demand is increasing with investors and banks looking to stock up on secure assets.
Demand for gold rose by 6 percent to a 1-1/4 year high in the third quarter of 2011, driven by central bank purchases and European demand for bullion against the backdrop of the escalating euro crisis, according to a report by the World Gold Council (WGC).
After a 20 percent slump in the third quarter from the previous one, gold imports to India, the world's biggest consumer of bullion, are likely to recover in the last quarter of 2011 as demand emerges from traders who destocked in the third quarter of the current year, the World Gold Council's India head said.
Crucially, in today's report, the WGC note that additional purchases were made by a number of countries' central banks, which cannot currently be identified due to confidentiality restrictions, UBS said in a research note.
The gap between the known purchases and the confidential ones is very significant... This information is very bullish. And no doubt the market will be busy speculating on the identity of such buyers.
Even a move by hedge fund manager and long-time gold bull John Paulson to slash ETF bullion holdings by a third does not appear to be a sign that he is abandoning his upbeat view of the metal, industry sources and analysts said.
Paulson may be moving to gold equities or physical gold. After all even with ETFs there is counter-party risk, Credit Agricole analyst Robin Bhar said. He may be switching holdings from one gold vehicle to a safer gold vehicle.
Holdings of the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust climbed 0.72 percent from Tuesday to Wednesday, while that of the largest silver-backed ETF, New York's iShares Silver Trust remained unchanged for the same period.
Spot silver fell 2.88 percent to $32.71 an ounce from $33.68 late in New York on Wednesday, platinum fell 0.91 percent to $1,598.2 an ounce from $1,612.7 and palladium fell 3.18 percent to $625 an ounce from $644.72.