Gold fell on Thursday after the head of the European Central Bank played down expectations that the central bank would dramatically increase the measures it is using to fight the debt crisis, thereby undermining the euro. The ECB delivered a widely-expected quarter-point cut to bring its benchmark refinancing rate to a record low, yet central bank president Mario Draghi said the decision was not unanimous and would not be drawn on whether there would be more cuts.
European Union leaders also start a crucial summit on Friday that investors hope will deliver a comprehensive solution to the region's debt crisis, which now threatens the top-notch credit ratings of Germany and France. Although the gold price has struggled to make upward progress this week, largely a function of a preference among investors to hold dollars, ETF holdings of metal are near record highs and a sharp increase in bullish options plays reflects a desire to hold bullion right now.
Lower eurozone rates and the ECB's commitment to provide banks with more favourable longer-term funding are, in theory, supportive of gold, although the central bank's lukewarm response to the crisis has left markets dismayed. Spot gold was last bid at $1,713.80 an ounce by 1507 GMT, down 1.6 percent on the day and set for a 1.8-percent decline this week, as the weakness of the euro against the dollar has made it more attractive for European investors at least to sell assets priced in the US currency.
"The rate cut and what has been said by Mario Draghi are pretty much in line with central expectations from much of the market. Broadly it is positive for gold: additional liquidity and easing but no big surprises no financial 'bazooka'," Tom Kendall, analyst at Credit Suisse said. ETF holdings of gold have risen to a record above 70 million ounces this week, while the options market shows a strong pick-up in call options, which give the holder the right but not the obligation to buy gold at a set price by a set date, at $1,800 an ounce.
Calls at $1,800 an ounce have risen by more than 3,000 lots, or 3 million ounces, in the last week, indicating a growing belief that the price could be trading above this level by the end of the year. In other precious metals, silver was quoted down 2.1 percent at $31.79 an ounce, while platinum was last down 1.3 percent at $1,500.49 an ounce.
Platinum is trading at its steepest discount to gold since Reuters began collecting data on the metal's price in 1985. The price of platinum, which is used principally in jewellery and vehicle catalytic converters, is now more than $200 below the price of gold, highlighting the concern among investors over the impact on the global economy from the eurozone debt crisis.
Any jolt to consumer confidence can result in a drop in discretionary spending on luxury items such as jewellery or new cars, delivering a twin hit to platinum demand. The market is expected to show a surplus this year of around 195,000 ounces, in contrast with last year's deficit of 25,000 ounces, when demand oustripped supply, according to refiner Johnson Matthey in a recent report.
Palladium was last down 1.3 percent on the day at $664.25 an ounce, having rallied sharply this week to its highest since September, when it hit one-year lows. "Palladium continued to outperform its sister metal, platinum," HSBC analyst James Steel said in a note.