Gold fell around 1.5 percent on Thursday, set for its biggest one-day drop in nearly three weeks, after the European Central Bank dashed hopes of more-dramatic action to fight the eurozone debt crisis. Gold initially rose 1 percent after the ECB cut interest rates and said it would offer banks long-term funds. However, the rally fizzled after ECB President Mario Draghi doused expectations the bank would ramp up its bond buying.
"The headline risk out of Europe has been incredible. One headline can stop gold dead in its tracks and turn it back lower," said Fred Schoenstein, trader at Heraeus Precious Metals Management. "A lot of people are looking to buy gold down around its 50-day moving average. If sell-stops push through below that level, we could see another round of selling," he said. Spot gold fell 1.8 percent to $1,709.59 an ounce by 11:42 am EST (1642 GMT), on track for its biggest daily decline since November 21.
US gold futures for February delivery were down $30.80 at $1,714.40 an ounce. Volume was on track to surpass its 30-day norm, bucking a trend of weak turnover in the last several sessions. COMEX gold option floor trader Jonathan Jossen said option dealers were largely buying outright put options and put spreads to limit further downside risk in the underlying futures.
A number of put options with strike prices between $1,600 and $1,700 an ounce were traded, Jossen said. Spot silver was down 3 percent at $31.52 an ounce. The ECB delivered an expected 25-basis-point cut to bring its benchmark interest rate to a record low of 1 percent, yet Draghi said the decision was not unanimous and would not be drawn on whether there would be more cuts.
The gold market will take trading cues from a European Union summit on Friday aiming at reaching a comprehensive solution to the region's debt crisis, which threatens the credit ratings of core economies Germany and France. Although the gold price has struggled to make upward progress this week, largely a result of a preference among investors to hold dollars, ETF holdings of the metal are near record highs and a sharp increase in bullish options plays reflects a desire to hold bullion right now.
Among platinum group metals, platinum was down 1.6 percent at $1,495.75 an ounce, and palladium was 1.5 percent lower at $665.65 an ounce. Platinum is trading at its steepest discount to gold since Reuters began collecting data on platinum's price in 1985. The price of platinum, used principally in jewellery and vehicle catalytic converters, is now more than $200 below that of gold, highlighting the concern among investors over the impact on the global economy from the eurozone crisis.
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