Gold extended an earlier slide on Wednesday in its largest one-day fall this month as the escalating euro zone debt crisis kept the euro near one-month lows against the dollar, making it more attractive to non-U.S. investors to sell bullion.
Adding to the burden on gold, which can offer investors some protection against inflation, U.S. data painted a benign picture of consumer prices pressures in October, which fell for the first time in four months.
The European Central Bank stepping into the bond markets to prop up Italian and Spanish debt did little to calm fears about the spread of the debt crisis, as reflected by the yawn in the gap between yields on the benchmark bonds of the highest-rated euro zone members such asFrance or Austria over those of Germany.
Gold fell broadly, dropping in most of the major currencies, including in euros, although bullion denominated in the single European currency has easily outperformed Bund futures, European benchmark equities, the trade-weighted euro and peripheral euro zone debt this month.
Gold priced in dollars was last down 1.3 percent on the day at $1,758.30 an ounce by 1534 GMT, set for its first weekly decline in five weeks.
You can argue that we haven't seen anything but escalation (in the crisis) in the last two weeks and gold has not done anything meaningful on the upside, but investors have been voting with their caution and moving into gold, Ole Hansen, senior manager at Saxo Bank said.
The price hasn't budged so someone is getting rid of gold up here. Whether that is because we are approaching the end of the year and the time when profits are booked and locked in ... remains to be seen.
Gold touched an intraday high of $1,783.29 an ounce on Wednesday before encountering hefty selling pressure which pushed the price down to a low of $1,753.04.
Gold, which has risen by nearly 15 percent since hitting a two-month trough in late September, has benefited from investor demand for gold in the current market turmoil, but has struggled against the headwind of a stronger dollar.
The amount of metal held by exchange-traded funds has risen by 966,000 ounces in the last month, while U.S. futures data shows speculators have raised their holdings of gold futures <0#GC:> by nearly 1 percent, or 1.8 million ounces, in this time.
The continued ETF support is encouraging, and underscores the renewed confidence in the gold market, Walter de Wet, a precious metals analyst at Standard Bank, said in a note.
Our strategic view remains unchanged: gold will push higher in 2012 with a target of $2,000 in the first quarter of 2012.
Hedge fund manager John Paulson, the largest investor in the SPDR Gold Trust, the biggest gold ETF, cut his stake in this ETF by a third in the third quarter of this year, although analysts said he may have shifted his investment in bullion to physical bars.
ELEMENT OF DOUBT
There is an element of doubt in parts of the investment community that the gold price will be able to break above this year's record $1,920.30 an ounce, especially given the potential for worsening money-market conditions to prompt a sell-off by cash-hungry institutions.
The largest overnight change in open interest in COMEX gold derivative contracts that expire next week emerged in bullish call options -- which given the owner the right, but not the obligation to buy an asset at a pre-determined price by a set date.
Open interest fell by nearly 2,700 lots, representing 270,000 ounces of metal, on just seven contracts of call options with strike prices ranging from $1,780 to $2,200.
Investors tend to favour gold during times of financial or political uncertainty because of its safe haven properties, although bullion has moved in close correlation with riskier assets recently, as harried investors liquidate gold positions to cover losses elsewhere.
French borrowing costs rose as the euro zone's second largest economy becomes the latest target of investor angst as a comprehensive solution to the region's two-year debt problems remains elusive, with contagion spreading to other top-rated sovereign issuers such as the Netherlands and Austria.
Market pressure is growing on the ECB to buy large amounts of bonds without sterilising the purchases -- effectively the same process of pumping cash into the market undertaken by the U.S. and UK central banks.
The euro fell for a third straight day against th edollar to hit five-week lows as rising French and Italian borrowing costs particularly rattled investors.
Silver was last trading down 2.2 percent at $33.76 an ounce, while platinum was down 1.5 percent on the day at $1,613.24 an ounce and palladium was down 1.7 percent at $648.72.