Gold prices fell for a second day on Wednesday, testing support near $1,530 an ounce, 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 extended losses against the dollar to a new 23-month low in early New York trade as Italian borrowing costs soared and concerns mounted over Spain's banking sector and upcoming Greek elections.
Spot gold slid to a low of $1,531.49 and was down 1.2 percent on the day at $1,536.50 an ounce by 1353 GMT. US gold futures for August delivery were down $13.10 an ounce at $1,537.90. Gold prices has fallen by more than 7 percent in May, marking its worst monthly performance since December, when it fell by nearly 11 percent. "Nothing is able to withstand the current dollar strength," Saxo Bank vice-president Ole Hansen said. "The secure government yield levels continue to fall to unbelievably low levels, a clear sign of the stress the financial markets are under."
"Gold is still stuck in its major $1,520 to $1,600 range, and once again it looks like we have to determine exactly how strong that support is." Market players are worried about Spain's plans to raise new funds to recapitalise nationalised lender Bankia when the country's borrowing costs are rising daily and are flirting with euro-era highs. "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," Robin Bhar, an analyst at Societe Generale, said.
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.
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 1.4 percent to $27.45, on course for a third successively monthly fall after having lost more than 11 percent so far in May. Platinum was down 2.4 percent at $1,392.99, having touched its lowest in 4-1/2 months, while palladium was down 1.9 percent at $589.47.
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