NEW YORK/LONDON Gold tumbled as much as 3 percent on Tuesday, resuming its month-long rout on fears of a potential Greek default and a bleak assessment of the U.S. economy from the Federal Reserves.
The safe-haven buying that has aided gold's three-year rally was absent throughout, as three days of gains were wiped away. But nor did bullion trade consistently with risk assets, underscoring confusion about its role in financial markets.
Gold sank early with European stocks on fears that the region's sovereign debt problems would take a toll on it banks. Gold then deepened losses mid-morning even as U.S. stocks pulled off their lows. But it was back in sync at the close, as Wall Street indices rallied to a last-minute 2 percent gain.
Even so, with gold's trading volume still about 25 percent below the norm, few traders were prepared to bet that two months of extraordinary volatility were over.
"Yesterday on that good rally the volume wasn't there. It seems the volume only comes into play when the gold is sold off," COMEX gold options floor trader Jonathan Jossen said.
U.S. gold futures for December delivery settled down $41.70 at $1,616 an ounce.
Spot gold fell as far as $1,595 an ounce, but were later trading down 2.2 percent $1,620 an ounce by 4:32 p.m EDT, well off an overnight session high of $1,678.
Jossen said big players had been buying put options in the last several sessions to protect their downside risk.
The crisis-stricken euro zone was in focus early in the day, as French-Belgian municipal lender Dexia SA (DEXI.BR) became the first European bank to have to be bailed out due to the sovereign debt crisis, concentrating minds on the potential for an escalating banking sector crisis.
Federal Reserve Chairman Ben Bernanke initially gave markets a small shot in the arm with a firmer indication that the bank was prepared to take further steps to prevent a double-dip recession, but traders later focused on his bleak assessment that the economy was "close to faltering".
S&P 500 futures .SPX vacillated through the day, at one point entering bear territory marked by a more than 20 percent slide from its peak. But it zoomed higher at the close, ending up 2 percent as investors rushed in to buy beaten-down shares.
Gold had rallied as much as 6 percent in recent sessions, but remained more than 15 percent below its record of $1,920.30 an ounce set in early September.
SOME GOLD MINERS HEDGE, OUTLOOK BRIGHT
Gold has fallen more than 15 percent from its record above $1,900 an ounce in early September. While some traders viewed the pull-back as a necessary correction from an accelerating rally, bullion is struggling to find a floor after months of extreme volatility and a growing link with risky assets.
While speculators in the COMEX gold futures have largely bailed out, pulling open interest to near a two-year low, investors in exchange-traded funds continued to hold relatively firm and have shown no sign of any large outflows.
In the mining sector, gold producers in the second quarter reported their first consecutive quarterly net hedging in 10 years, driven by new hedges by small producers, metals consultancy Thomson Reuters GFMS and French bank Societe Generale said.
Goldman Sachs reiterated its 12-month gold price target of $1,860 an ounce, while cutting its 2012 forecasts for oil and copper prices.
The U.S. bank said in a note that gold prices would continue to be driven by low U.S. real interest rates due to a weakened economic outlook.
Credit Suisse raised its 2012 gold price forecast to $1,850 an ounce, saying gold, as a clear beneficiary of the uncertainty and dislocations in financial markets, has further upside with the crises set to continue.
Silver fell 3.7 percent to $29.23 an ounce. Platinum was down 3.2 percent at $1,448.99 an ounce, while palladium was down 6.3 percent at $543.47.
Platinum widened its discount to gold to nearly $200 an ounce in earlier trade, an unprecedented level. Platinum prices were hurt by a 29 percent hike in U.S. futures margins.
(Editing by Dale Hudson and David Gregorio)