LONDON (Reuters) - Gold fell almost 2 percent on Thursday as worries about a disordered bankruptcy in Greece and a deepening debt crisis in Italy weighed on market sentiment and pushed investors to liquidate commodity assets, including precious metals.
The euro briefly extended gains versus the U.S. dollar after data showed new claims for unemployment benefits declined for a second straight week in the Unites States, and as easing Italian bond yields prompted investors to take on a little more risk.
The dollar however, trimmed losses shortly after, pushing gold to a session low of $1,739.7 an ounce.
A stronger U.S. currency makes dollar-priced commodities such as precious metals costlier for holders of other units.
Spot gold traded at $1,743.59 an ounce by 1511 GMT, down 1.44 percent from $1,769.54 late in New York.
Gold has confounded market watchers by refusing to behave like a safe-haven and instead has tracked equities over the past few weeks, but the escalating European debt crisis could see bullion ditch its risk-asset mantle and return to record highs.
“Broader trading is jittery but gold is more supported,” said analyst Andrey Kryuchenkov of VTB Capital.
“If the dollar weakens and the broader market is more risk-friendly gold will track it. If uncertainty remains, gold will be supported by safe haven buying.”
Italy moved closer to a national unity government on Thursday, following Greece’s lead in seeking a respected veteran European technocrat to pilot painful economic reforms in an effort to avert a euro zone bond market meltdown.
Some however feared that a deepening euro zone crisis will continue to weigh on gold.
“Looking at what is going on in Europe a further round of liquidation across commodities, including gold, is possible,” said Credit Suisse analyst Tom Kendall.
“It’s not the fact that people are staying away from gold as a safe haven asset but short-term players sell across market classes when they see the market shifting.”
Italy, now firmly at the heart of the euro zone crisis, paid a 6.087 percent yield, the most in 14 years, at a one-year debt auction on Thursday but placed the full planned amount of 5 billion euros.
Greek political leaders resumed their search for a deal on a new prime minister after one agreement collapsed.
Emphasizing worries, the European Commission said the euro zone economic growth will slow sharply next year as weak confidence undermines investment and consumption and tighter fiscal policies reduce domestic demand.
Gold fundamentals however, remained supportive.
New York’s SPDR Gold Trust, the biggest gold-backed ETF, said its holdings rose 0.24 percent on Wednesday from Tuesday, while that of the largest silver-backed ETF, New York’s iShares Silver Trust gained 0.26 percent.
“Physical gold demand is strong in some parts of Europe,” Kendall said.
“Other precious metals such as platinum and palladium however are suffering with what is going on in the auto sector; floods in Thailand have caused serious disruptions in Asia. There is no real sense that we’ll have a turning point for PGMs (platinum group metals) for the moment.”
Silver lost 2.14 percent to $33.31 an ounce while platinum fell 1.29 percent to $1,604.8 an ounce and palladium fell 1.40 percent to $635.47 per ounce.
Editing by Alison Birrane