Gold drops on apparent progress over debt deals

Gold turtles and toads are displayed at a jewelry shop in Seoul April 21, 2011.

NEW YORK (Reuters) - Gold fell on Thursday, extending its drop from a recent record high as signs of progress on debt deals in Europe and the United States drew investors to riskier assets at the expense of safe havens.

Bullion came under pressure after the White House said it saw momentum for a "balanced" deficit deal, but denied that U.S. President Barack Obama and the House of Representatives speaker were close to a pact. Gold is up 6 percent in July largely due to uncertainty over the U.S. debt talks.

Silver tumbled more than 2 percent as draft conclusions of Thursday's emergency summit showed euro zone leaders were set to give their financial rescue fund new powers to fight debt contagion. The S&P 500 rallied 1.5 percent.

"Any kind of normalization, either economic or financial policy, is going to have an adverse effect on the gold price," said Mark Luschini, chief investment strategist at Janney Montgomery Scott, which oversees $54 billion in assets.

"However, there are still those elements of uncertainty that leave a wrinkle out there for those who are already long gold to not abandon it," he said.

Spot gold fell 0.7 percent to $1,588.54 an ounce as of 3:18 p.m. EDT, around $20 below its record $1,609.51 set on Tuesday.

U.S. gold futures for August delivery settled down $9.90 an ounce at $1,587, after trading between $1,584.90 and $1,605. Trading volume topped 220,000 lots, set for one of the market's busiest days since late May.

Spot silver dropped 2.3 percent to $39.17 an ounce.

Precious metals fell as riskier assets rallied after the draft conclusions from the European emergency summit. U.S. crude oil futures briefly rose above $100 a barrel.

On charts, gold faces considerable difficulty moving back toward $1,600 an ounce, and sterling-priced gold is having even more resistance toward rising above 1,000 pounds, said independent investor Dennis Gartman.

A decline toward 955-970 pounds would be reasonable, he said.

UNCERTAINTY OVER DEBT DEALS

The draft summit statement suggested the euro zone bailout fund, the European Financial Stability Facility, would be allowed for the first time to help states earlier with precautionary loans. Euro zone leaders also signaled they were willing to let Greece default temporarily.

Minds have been concentrated by the danger that Europe's debt crisis could engulf the much bigger economies of Spain and Italy. Greece, Portugal and Ireland have already succumbed.

"There are a lot of unsolved issues for the time being, and gold reacted really marginally after the draft EU summit conclusions. There was no real profit-taking," said Bayram Dincer, an analyst at LGT Capital Management.

"There is no shift in risk perceptions, which is really important for gold market participants," Dincer said.

The euro rose to a two-week high after French President Nicolas Sarkozy said the EFSF would be able to intervene on primary and secondary debt markets when the European Central Bank deemed it necessary. <FRX/>

Bullion investors continue to pay close attention to the U.S. debt talks. U.S. lawmakers have struggled to break their impasse as an August 2 deadline looms for raising the government's $14.3 trillion debt ceiling.

There were some signs of progress as White House and congressional leaders worked furiously to craft a deficit-reduction deal to avert a catastrophic default and downgrades to the United States' top-notch credit quality.

A U.S. default would likely reduce the safe-haven appeal of U.S. Treasuries and the dollar, lifting gold.

Platinum was up 0.6 percent at $1,782.50 an ounce, while palladium rose 1.4 percent to $803.55 an ounce.

(Additional reporting by Jan Harvey in London; editing by Jim Marshall and Dale Hudson)