Gold turned lower early on Wednesday as investors raised cash to cover heavy losses on Wall Street, and as the dollar soared against the euro on sharply lower risk appetite. Gold erased initial gains as losses in the equity markets deepened, prompting investors to sell assets across the board. The S&P 500 index dropped 2.5 percent a day after the Federal Reserve downgraded the outlook for the US economy.
"There is a time when investors just sell off assets and ask questions later rather than shifting over funds into safe havens," said Tom Pawlicki, precious metals and energy analyst at MF GLOBAL. Also weighing on gold, the dollar rallied more than 2 percent against the euro as investors bought US Treasury debt as a safe haven.
Spot gold was at $1,195.50 an ounce at 11:55 am EDT (1555 GMT), against $1,201.85 late in New York on Tuesday. US gold futures for December delivery were down 20 cents at $1,197.80. Spot bullion rose as high as $1,207.05 on Tuesday after the Fed kept interest rates near zero and said it would use cash from maturing mortgage bonds to buy government debt, keeping an easier monetary policy in place longer than expected. Among other commodities, oil prices fell more than 2 percent, weighed down by strength in the dollar, while base metals such as copper also slipped as the market mulled economic and demand growth prospects.
Overall, raw materials prices are being pressured by concerns over the Fed's lacklustre view on the US economy. This could support gold, however. "Slower US growth should lead to dollar strength against most risky currencies," Barclays Capital said in a note. Among other precious metals, silver was at $17.82 an ounce against $18.25, while platinum was at $1,524.05 an ounce against $1,539.50 and palladium was at $463.98 against $473.75.
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