Gold fell 1 percent on Friday, after the dollar surged against the euro and fears about an imminent credit downgrade of euro zone countries prompted bullion investors to take profits on the recent rally. The metal fell along with US equities and other commodities as ratings agency Standard & Poor's was poised to lower ratings of several euro zone countries including France and Austria.
The news rattled markets in the first blow of the new year for the troubled single currency. The euro sank to a 16-month low at under $1.27, while the price of safe-haven US Treasuries climbed. "The dollar seems to be the main go-to safe-haven play at the moment. Market talk of downgrade has taken away some of the recent support from gold," said David Meger, director of metals trading at futures brokerage Vision Financial Markets.
"Given the size of its recent rally, it's certainly not surprising to see profit taking on the back news like this," Meger said. Gold was still up 1 percent for the week, for a second consecutive weekly gain, despite euro's woes. The metal's positive correlation with the euro had shown signs of strain after the two had traded in lockstep in the previous two months.
"Sovereign issues in the euro zone are clearly not over and we may see further bouts of price correction in the gold market over the coming months," said Anne-Laure Tremblay, analyst at BNP Paribas. Spot gold was down 1 percent at $1,633.90 an ounce by 2:50 pm EST (1950 GMT).
It was still up about 5 percent so far this year, thanks to buying by investors re-entering the market after a 10 percent drop in December. US gold futures for February delivery settled down $16.90 an ounce at $1,630.80. US financial markets will be shut on Monday for the Martin Luther King day holiday.
Trading volume was around 40 percent above its 30-day average, set to be one of the heaviest trading days since mid-December. On the options front, COMEX gold options floor trader Jonathan Jossen said a number of $1,500 puts were traded, as gold futures investors sought protection against the downside.
Buying sentiment also worsened after the Shanghai Gold Exchange said it will temporarily raise margins and daily trading limits for its gold and silver forward contracts on January 20 ahead of the Lunar New Year holiday. Analysts said gold has gotten a boost from physical buying from China, the world's largest bullion consumer. But buying in China should ease as New Year celebrations get underway.
Silver was down 2.5 percent at $29.51 an ounce. Spot platinum was down 0.7 percent at $1,481.24 an ounce. Platinum posted its best weekly performance since October, however, with a 6 percent gain. The metal was boosted by concerns over South African power supply, which state power utility Eskom said could be under pressure this year. Spot palladium was down 0.2 percent at $635.22 an ounce.
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