December 28, 2011 / 1:00 AM / 8 years ago

Gold down 2 percent, at 3-month low as dollar surges

NEW YORK (Reuters) - Gold fell 2 percent to a three-month low on Wednesday, as the dollar rallied against the euro on more jitters about European debt, while losses in U.S. equity and commodity markets triggered a technical sell-off of the precious metal.

Gold and silver bars are pictured at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna August 26, 2011. REUTERS/Lisi Niesner

Bullion has declined for three straight days, on track for its smallest yearly gain in three years.

Gold’s losses deepened as Wall Street slid, with the S&P 500 stock index erasing gains for the year, while the euro hit an 11-month low against the dollar ahead of a key Italian debt sale. Thin holiday trading also exacerbated volatility. .N <FRX/>

Silver tumbled more than 5 percent, leading the decline in industrial commodities. Silver is on track to end the year down 11 percent after a $3 drop in the last five sessions, reversing hefty gains in the past two years.

Analysts said a bearish double-top technical pattern and gold’s closing at its lowest level since July could send more bullion investors heading for the exit.

“When you get so many people who bought gold thinking it was a safe haven and now under water, that’s the reason why it can come off more, perhaps on dollar strength,” said Rick Bensignor, chief market strategist of Merlin Securities.

“The dollar becomes the safe place, not the gold market,” said Bensignor.

Spot gold was down 2.4 percent at $1,554.64 an ounce by 2:48 PM EST (7:48 p.m. British time), having earlier hit a low of $1,553.89, its lowest since September 26.

U.S. February gold futures settled down $31.40 at $1,564.10, with trading volume more than doubled its previous.

Spot silver fell 5.7 percent to $27.03 an ounce.

Gold’s technical weekly charts showed that the metal is breaching key support of a three-year rising trendline, Bensignor said.

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Graphic: r.reuters.com/bar75s

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Bensingor said gold could fall to $1,425 an ounce based on an “equal legs down” pattern on technical charts, which measures the magnitude of bullion’s drop from its record high at above $1,920 an ounce on Sept 6 to a low of $1,534 an ounce on September 26.

Also weighing on sentiment was news the U.S. Mint has enough American Eagle gold and silver bullion coins to meet demand and does not expect to allocate them in early 2012.

DOLLAR RALLY VS EURO PRESSURES

A 1 percent jump in the dollar index .DXY broadly pressured commodities as investors flocked to the safety of the U.S. currency and Treasury bonds, traders said.

“This is a risk-aversion issue for sure. There are some geopolitical concerns out there that have become heightened this week,” said Jason Schenker, president of Prestige Economics LLC.

Gold initially traded just slightly lower after news Italy’s short-term debt costs halved at an auction as a new package of budget austerity and an injection of cheap long-term money from the European Central Bank won Rome some respite.

However, market optimism was short-lived and focus was quickly turned to worries about a sale of longer-dated bonds on Thursday.

Although gold traditionally has a safe-haven appeal, the euro zone debt crisis is threatening the global economy, causing a liquidity shortage in markets and forcing investors to abandon their gold positions to cover losses elsewhere.

Among platinum group metals, platinum fell 3.2 percent to $1,381.74 an ounce, while palladium dropped 2.9 percent to $639.47 an ounce.

Additional reporting by Susan Thomas in London, Rujun Shen in Singapore; Editing by Dale Hudson, Bob Burgdorfer and David Gregorio

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