Gold slips as Wall Street sinks, dollar surges

Visitors touch a 220 kg (485 lbs) gold bar, worth around $12.8 million at today's price, on display at the Jinguashi Gold Ecological Park in Xinbei city September 16, 2011.

NEW YORK/LONDON (Reuters) - Spot gold held to a slight loss on Wednesday in a global market sell-off, but losses were limited as investors sought safety amid doubts economic reforms in Italy and fears that euro zone leaders may be too late to resolve the region's debt crisis.

Bullion fell around 0.5 percent as Wall Street dived nearly 4 percent and the U.S. dollar surged, after Italian borrowing costs rose to a breaking point as Prime Minister Silvio Berlusconi's insistence on elections instead of an interim government opened the way to prolonged political and economic turmoil.

Gold was still more than 1 percent higher over the last 3 sessions, driven by safe-haven bids amid concerns about the viability of the euro and the 17-nation currency bloc. Germany's Chancellor Merkel said on Wednesday Europe's plight was now so "unpleasant" that deep structural reforms were needed quickly.

"Gold prices are likely to reflect the degree of trust and confidence that investors have in the authorities to solve the crisis," said HSBC metals analyst James Steel.

"Even the suggestion that some countries should be allowed to exit the euro or that the euro be scrapped altogether is itself a bullish indicator for gold," he said.

Gold dropped 0.6 percent to $1,773.99 an ounce by 2:32 p.m. EST. On Tuesday, it hit an intraday high of $1,802.60 -- its strongest since late September.

U.S. gold futures for December delivery settled down $7.60 at $1,791.60 an ounce. Trading volume exceeded its 30-day norm during Wednesday's volatile session, breaking a recent trend of slower turnover.

Silver fell 2.8 percent at $33.95 an ounce.

Bullion was weighed by widespread liquidation outside of the gold market, but underlying demand was reflected by its small decline in the face of a resurgent U.S. dollar and as crude oil, industrial metals and grains broadly fell.

The euro plunged more than 2 percent against the dollar as fears grew that Italy may be the next European country to seek a bailout. U.S. Treasuries prices rallied on a safety bid.

Also pressuring gold was news China's annual rate of inflation eased to 5.5 percent in October, the third straight month of decline from the three-year high of 6.5 percent in July and in line with analysts' expectations.

EURO ZONE CRISIS UNDERPINS

Gold benefited from economic uncertainty after European leaders last week opened the idea that Greece's sovereign debt could default and the country might not receive EU financial aid if it failed to adopt austerity measures.

Meanwhile, benchmark bond yields of Italy, the bloc's third largest economy, shot to a level that is widely deemed unsustainable, reflecting investors' concerns that they may not get their money back.

"The market is extremely worried. Changing leaders both in Greece and Italy doesn't change the fiscal situation and leaves us with a period of uncertainty," said Ole Hansen, senior manager at Saxo Bank.

Holdings of the largest gold-backed exchange-traded-fund (ETF), New York's SPDR Gold Trust, gained nearly 1 percent from Monday to Tuesday, while those of the largest silver-backed ETF, New York's iShares Silver Trust, dipped 0.12 percent for the same period.

(Additional reporting by Lewa Pardomuan in Singapore; editing by Bob Burgdorfer)