Gold fell for a second day on Wednesday, under the influence of a weaker euro as the euro zone debt crisis engulfed Spain and sent investors scrambling for a safe haven in the form of US dollars.
The euro fell sharply against the yen and remained around two-year lows against the dollar as concerns intensified about the solvency of Spanish banks and Madrid's ability to bail out its financial sector.
Spot gold was down 0.5 percent on the day at $1,547.39 an ounce by 12:21 SA time. The price has fallen by nearly 7 percent in May, marking its worst monthly performance since December, when it fell by nearly 11 percent.
“As we've seen during other periods of extreme risk aversion, investors go into Treasury bonds, which are yielding record lows, or they stay in cash. It's preservation of capital ... so for the moment, gold is unloved, but I think it means if you are still a bull, you will get better levels at which to express that,” Robin Bhar, an analyst at Societe Generale, said.
“We look at the most recent lows around the $1,520 level as a target and possibly below there as this storm continues,” he said.
The European Commission will set out its economic strategy for the euro zone on Wednesday, spelling out measures to balance growth with unpopular fiscal consolidation that will be particularly pointed for Spain and Italy.
Spanish borrowing costs remained stubbornly above 6.5 percent, the highest yield for the benchmark 10-year bond in six months, while the cost of insuring five-year Spanish debt against default hit a record high.
Euro zone economic sentiment fell more than expected in May as pessimism among manufacturers and retailers in particular worsened, although consumers became slightly less downbeat about the economy for the year ahead.
EURO LINK HOLDS
Gold's correlation to the euro softened a touch on Wednesday, easing to 52.0 from closer to 57.0 a week ago, meaning that the two assets are still more likely to move in sync with one another than they were in early May, when this relationship was at its weakest in six months.
“The song remains the same as well as the market slavishly follows the euro on its ups and downs. The situation in Europe seems to be going from bad to worse, with Spain now teetering on the brink as well as Greece,” Marex Spectron head of precious metals David Govett said in a note.
He said gold was likely to stick to a range between $1,540 and $1,580 for the time being.
This week holds a number of event risks for the precious metals market. US economic growth figures for the first quarter are due on Thursday, while monthly employment data is due on Friday, and both are likely to offer investors some sort of indication on what policymakers at the Federal Reserve will signal at their rate meeting in June.
Investors in gold via exchange-traded products have cut their holdings to a four-month low of 69.590 million ounces in May, which has witnessed the third consecutive monthly net outflow of metal, the longest stretch of declines since late 2009.
On the derivatives market, investors in ETP options are positioned heavily for another drop in the gold price. Near-the-money options on the SPDR Gold Trust show a heavy skew in favour of bearish put options, which give the holder the right, but not the obligation, to sell shares in the fund at a predetermined price by a set date.
Put options on SPDR shares expiring on June 16 at 145.0, a level that equates to a spot gold price of approximately $1,494.00, show the most open interest, with 52,453 lots, equal to 524,530 ounces of metal.
In other precious metals, silver fell 0.6 percent to $27.65, on course for a third successively monthly fall, after having lost nearly 11 percent so far in May.
Silver ETP holdings are still up on the month, around 489.38 million.
Platinum was down 1.5 percent at $1,403.49, while palladium was down 1.4 percent at $592.97. - Reuters