PRECIOUS-Gold tumbles after ECB offers tepid crisis reponse

Thu Dec 8, 2011 10:18am EST

(Updates throughout)

* Price set for 1.8 pct weekly fall after ECB

* ETF holdings steady near record; bullish options bets up

* Palladium holds near three-month highs

By Amanda Cooper

LONDON, Dec 8 (Reuters) - 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 delievered 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 euro zone 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 U.S. 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.

Gold can act as a safe-haven for investors in times of financial or economic uncertainty, but in cases of extreme risk aversion, where the desire for cash increases, it is also prone to the kind of sell-offs that hit stocks, bonds or currencies.

"This is big - a lot of people, stocks, bonds, currencies, had been counting on the ECB and (Draghi's) basically pulled the rug out from under the market," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey. "There's a sense of shock right now."

HOPE FOR THE EURO

Hopes for a definitive plan to tackle the two-year-old euro zone debt crisis were fading a day before the summit and expectations were dented further by pessimistic comments from a senior German official and new figures exposing deepening stress among Europe's banks.

"A final solution out of Europe is highly unlikely," Jeremy Friesen, Commodity Strategist at Societe Generale in Hong Kong, said, but added that a total breakdown was also unlikely as central banks and finance ministries have shown the will to cooperate to fight the crisis which is threatening to split up the euro zone and sink the global economy into recession.

"I don't expect Merkel or any hawkish decision-makers to squander this opportunity to really make reforms, now that they have come so far. I don't see them capitulating at this point."

A disappointing result from the summit could undermine the euro and send gold prices lower, at least initially.

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. <0#GC+++>

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 euro zone 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

"Market chatter revolved around supply tightness and Russian stockpile concerns. There have also been increases in fund purchases and option call buying recently, we believe," he said. (Reporting by Amanda Cooper; Editing by William Hardy)

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