Gold falls as Wall Street rises, risk appetite up

A gold jewellery shop owner arranges ornaments at a counter in Kolkata May 27, 2010.

NEW YORK (Reuters) - Gold fell 1 percent on Thursday, as a sharp Wall Street rally and rebounding risk appetite prompted investors to switch funds out of precious metals and into assets perceived as riskier.

The euro's advance for a third straight day, gains in industrial commodities including oil, and a 200 point gain of the Dow Jones industrial average lessened gold's appeal as a safe haven amid European credit contagion fears.

"Lately, when people are more risk averse, they go to the stock market. When there is uncertainty, gold seems to pick up demand," said Jeff Pritchard at California broker-dealer Altavest.

In the first quarter of this year, gold tended to take the lead from the equity markets and other "risky assets." Since mid-March, however, the metal has been rallying on worries that a deepening euro zone debt crisis could lead to double-dip recession.

Spot gold hit a low of $1,214.65 and was at $1,218.25 an ounce at 2:18 p.m. EDT (1818 GMT), against $1,230.35 late in New York on Wednesday.

U.S. gold futures for August delivery settled down $7.70 at $1,222.20.

Gold was pressured as the euro bounced above $1.21 after European Central Bank President Jean-Claude Trichet's noncommittal remarks on further bond purchases. The bank held interest rates at 1.0 percent.

Trichet also said after the ECB decision that he expects the euro zone's economy to recover at a moderate pace, with quarterly growth rates uneven.

News that China's exports jumped 50 percent in May also lifted stock markets, which had started to rise on Wednesday after Federal Reserve Chairman Ben Bernanke said the economic recovery was on a solid footing.

"With growth potential back on track both in the euro zone and the U.S., risk could get offloaded from bullion, and that is potential a weakness signal," said Pradeep Unni, senior analyst at Richcomm Global Services.

Heavy losses in the euro on the back of European sovereign debt concerns have lifted demand for gold this year as investors sought to diversify out of the currency, analysts said. The euro's bounce higher has curbed this buying.

"If you look at a chart of the euro, it's been punished quite severely for some time now, and it is not unreasonable to believe that it will have a bit of a bounce along the way," said Simon Weeks, head of precious metals at the Bank of Nova Scotia.

COIN, BAR DEMAND SOFTENS

Holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Trust, held at a record high 1,298.53 tonnes on Wednesday.

However, demand for small investment products like coins and bars has tailed off recently in Europe and the United States, UBS analyst Edel Tully said in a note.

"Physical demand, relatively dampened since Wednesday of last week, is now overshadowed by increased scrap supply out of Asia," she said. "This price-dependent supply... suggests more downside risk for the yellow metal in the short term."

Also on the supply side of the market, Statistics South Africa said the republic's gold output fell 6.2 percent in April from the same month of 2009.

Among other precious metals, silver was at $18.27 an ounce versus $18.07, palladium at $445 versus $447.50, and platinum at $1,532.50 an ounce against $1,525.

530.00 7.00 0.5 1466 4.4 Palladium Fix 450.00 2.00 0.4 402 11.9

(Additional reporting by Jan Harvey in London; Editing by Marguerita Choy)