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NEW YORK (Reuters) - Gold fell on Monday after early gains, moving in tandem with lower equity markets and other commodities, after Germany dampened hopes of a breakthrough in the euro zone's sovereign debt crisis.
Gold, which last week posted its biggest weekly gain in six weeks, dropped after Germany's finance minister said a weekend summit of EU leaders would not produce a definitive solution. The comments sharply pushed down the euro, global stocks and commodities in a sell-off of riskier assets.
Optimism over plans to tackle the euro zone crisis and signs of life in the U.S. economy have helped lift the traditional safe-haven metal to move in tandem with equities in the last several weeks. Price volatility could stay elevated due to low trading volume, analysts said.
"With renewed concerns that Europe will not have any progress any time soon, you are seeing investors take profits on the stock markets and that spills over to the metal markets," said Phillip Streible, a senior strategist with MF Global.
"The market has been eerily quiet for quite a long time and it's due for an explosive move."
Spot gold was down 0.6 percent at $1,668.90 an ounce by 2:55 p.m. EDT, having risen to $1,694.60 earlier in the session, its highest level since September 23.
The 25-day log-based correlation between gold and S&P 500 is now positive and the tightest in about four months, Reuters data showed. (Graphic: r.reuters.com/vuw93s )
Oliver Pursche, co-manager of the GMG Defensive Beta Fund (MPDAX.O), said gold is expected to stay positively correlated with equities in the near term, as investors tend to trade the two popular assets as a group.
Pursche said he expects reserve diversification by emerging-market central banks to boost gold to a record $2,000 an ounce in the first quarter of 2012.
U.S. gold futures for December delivery settled down $6.40 at $1,676.60 an ounce.
Trading volume was around half of the 30-day average, preliminary Reuters data showed, consistent with extremely weak turnover last week.
Analysts said that below-average trading volume and a drop in open interest are signs that bullion investors lacked conviction as they fretted over the European debt situation.
Gold options also suggest higher price volatility. The CBOE Gold ETF Volatility Index .GVZ, which is often referred to as the "Gold VIX" and is based on GLD options, surged 9 percent to 29, its biggest one-day gain in over two weeks.
Technical pressure in gold will continue until prices rise above key resistance at $1,700 an ounce, and it may take several attempts to post a decisive move above that, analysts said.
Adam Sarhan, chief executive of Sarhan Capital, said there was a bearish double-top based on the two recent highs formed in late August and early September.
Silver was down 1.7 percent at $31.62 an ounce. Platinum rose 0.4 percent to $1,549.74, while palladium was 1.1 percent lower at $612.72.
SETTLE CHNG CHNG VOL US Gold DEC 1676.60 -6.40 -0.4 1665.40 1696.80 102,899 US Silver DEC 31.821 -0.352 -1.1 31.475 32.675 35,484 US Plat JAN 1551.80 -3.10 -0.2 1545.70 1583.60 6,082 US Pall DEC 616.80 -3.75 -0.6 611.60 647.25 2,723
Gold 1668.90 -9.63 -0.6 1666.15 1694.60 Silver 31.620 -0.540 -1.7 31.490 32.640 Platinum 1549.74 5.61 0.4 1546.00 1577.75 Palladium 612.72 -6.98 -1.1 616.88 644.25
CURRENT 30D AVG 250D AVG CURRENT CHG US Gold 105,696 216,736 201,887 28.53 1.03 US Silver 38,360 53,916 81,853 47.93 -5.02 US Platinum 6,231 12,207 7,672 35.03 -0.01 US Palladium 2,760 3,791 4,530
Additional reporting by Pratima Desai in London; Editing by Dale Hudson, Bob Burgdorfer and Jim Marshall