* 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 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
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
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)