Gold fell on Wednesday driven by worries about the eurozone debt crisis, which weakened the single European currency against the dollar, mitigating the impact of safe-haven bullion buying. Italian and Spanish bond yields remained near euro-lifetime highs despite the presence of the European Central Bank in the market, while a disappointing German bond auction compounded the region's troubles.
The dollar rallied to its highest against a basket of major currencies in seven weeks, while its correlation to gold reached its most negative in a week, meaning that the bullion price was more likely to move inversely to the US unit. Spot gold was last down 1.08 percent on the day at $1,681.49 an ounce by 1512 GMT, having fallen to a session low of $1,679.59. So far in November, the gold price has fallen by about 1 percent, following October's 5.5 percent rise.
The expiry of options on gold futures on COMEX on Tuesday kept the gold price under pressure, even though most open interest was located around out-of-the-money options, along with evidence of further dollar funding stress. Three-month cross-currency basis swaps, a means for non-US investors to access dollar funding, showed the cost of acquiring the US currency rose to its highest since the credit crunch of late 2008, creating greater incentive among holders of gold to sell the metal in exchange for hard cash.
"We're seeing some post-options expiry selling coming through. The turmoil still going on in financial markets and the euro dollar swap rates are still fairly high.... Gold may still be a casualty of that," Credit Agricole analyst Robin Bhar said, who added that the fundamental backdrop for gold remained positive.
The gold price, which is still on track for a near-20-percent gain this year, its eleventh consecutive yearly price increase, has fallen by about 12 percent from September's record $1,920.30, but this has not deterred investors. Holdings of gold in exchange-traded funds backed by physical metal have risen more than a million ounces in the last week, their largest weekly increase since early August.
Total holdings of metal at the major ETFs tracked by Reuters are up 2 million ounces in November, the heftiest inflow since July's 2.95-million ounce net rise. "Total metal held in trust across the ETPs we track daily are at a record high, so we've seen the investment side starting to become very supportive but the physical side is still a little fluid," Barclays Capital's Cooper said.
Reflecting the demand among European investors for safe-haven assets in which to put their cash, European ETF inflows account for about 10 percent of total net inflows, while in terms of US gold futures, speculative investors have raised their holdings by nearly 3 million ounces in November, which would be the second-largest monthly increase of 2011.
Silver fell 3.7 percent to $31.46 an ounce, alongside both gold and the base metals, which came under pressure after the Chinese manufacturing data. Platinum and palladium were down between 1.5 and 3.3 percent. Platinum last traded at $1,544.75 an ounce, compared with $1,566.50 late in New York on Tuesday, while palladium fell to $582.7547 from $602.00 previously.