Gold drops on weak housing data and ignores Fed

NEW YORK (Reuters) - Gold fell on Wednesday but bounced off early session lows as weak U.S. housing data painted a bleak picture for economic recovery, prompting bullion investors to lighten positions in a wave of broad-based selling in commodity and stock markets.

A Jordanian goldsmith holds gold bracelets at his shop in Amman June 9, 2010. REUTERS/Muhammad Hamed

After the U.S. COMEX settlement, the Federal Reserve said at the end of its two-day policy meeting it acknowledged a faltering pace of U.S. economic recovery as it renewed its vow to hold interest rates exceptionally low for an extended period. Precious metals prices largely ignored the Fed and remained lower.

Solid gains in the holdings of the world’s largest gold-backed exchange traded funds suggested investment demand continued to provide underlying support, and price volatility could remain elevated due to near record COMEX open interest, traders said.

In early trade, the metal hit its lowest in more than a week after a report showed sales of new U.S. homes dropped a record 32.7 percent in May to the weakest level in at least four decades.

James Steel, chief commodity analyst at HSBC, said the U.S. economic news led to liquidation in gold and selling across different asset markets under thin volume.

“The weak home sales data led to some liquidation in gold, triggering the sale of some assets. The knee-jerk reaction for gold was to sell off but it has been gradually paring loses,” Steel said.

Spot gold was at $1,234.55 an ounce at 3:29 p.m. EDT, against $1,239 late in New York on Tuesday, having slipped to a one-week low of $1,224.30 an ounce.

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U.S. gold futures for August delivery settled $6 lower at $1,234.80 an ounce.

Gold was pressured by the dollar strength and caught up in selling of other assets as equity markets slipped after the disappointing home sales data, with oil and Reuters/Jefferies CRB index .CRB also dropping.

“There is (weakness) not just across commodities but across all markets,” said RBS analyst Daniel Major. “In terms of gold, there is a slightly more risk-off tone today, which seems to have resulted in dollar strength and... that has weighed on gold.”

Oil prices also fell by $2 to $76 a barrel after U.S. government data showed U.S. crude stocks rose sharply last week and the International Energy Agency forecast supplies would be comfortable for five years.

The usual inverse relationship between gold and the dollar, which weakened at the beginning of the year as both rose on risk aversion, seems to be reestablished, Major said.

The dollar fell against the euro after the Fed kept interest rates low for an extended period.

Among other precious metals, silver fell to $18.46 from $18.74, platinum was at $1,569.50 an ounce versus $1,582.50, and palladium at $472.50 against $481.50.

Additional reporting by Jan Harvey in London; Editing by Sofina Mirza-Reid