September 12, 2011 / 12:30 AM / 8 years ago

Gold drops 2.5 percent as investors cover equity losses

NEW YORK/LONDON (Reuters) - Gold dropped 2.5 percent on Monday, falling further from last week’s record highs, as mounting fears about the European debt crisis prompted investors to sell bullion to cover losses in equity markets.

One kilogram gold bars are seen in this picture illustration taken at the Korea Gold Exchange in Seoul August 9, 2011. REUTERS/Jo Yong-Hak

Spot gold has recoiled since jumping to a record high last Tuesday of $1,920.30. While viewed as a safe haven, gold often falls during a stock market sell-off as investors tap the liquid gold market to meet equities margin calls.

Fears of a potential Greek default that could spread through global markets slammed stock markets, triggering heavy liquidation in gold. U.S. equities rebounded in late trade to close higher, lifted by a technology merger agreement and hopes China might purchase Italian government debt.

But Wall Street’s bounce did not lift bullion from sharp early losses, traders said.

Some warned that technical signals pointed to more downside for gold.

“We have some technical selling now coming into the market. If we poke our head below the $1,800 level, we can see a fairly rapid downward acceleration that might carry us back down to $1,700,” said Frank McGhee, head precious metals trader at Integrated Brokerage Services LLC.

Spot gold was down 2.3 percent at $1,814.39 an ounce by 3:42 p.m. (1942 EDT). It fell more than 1 percent last week, its sharpest weekly decline since late June.

U.S. December gold futures settled down $46.20 at $1,813.30 an ounce. Trading volume was in line with its 30-day average, Reuters data showed.

Silver was down 3 percent at $40.10 an ounce.

“We had a similar situation in 2008, when stock markets dropped and pulled gold lower, as some hedge funds had to compensate loses by liquidating gold positions,” said Peter Fertig, a consultant at Quantitative Commodity Research.

“Depending on whether the situation in stock markets calms down, this could go on for another couple of days,” he said.

Greece confirmed on Monday that it had cash for only a few more weeks. [ID:nL5E7KC0F1] Investor confidence also was rattled by concerns that Moody’s Investors Service could downgrade the credit-worthiness of French banks, which are widely exposed to Greek bonds.

GOLD VOLATILITY SPIKES

Gold options’ implied volatility — a measure of how much traders expect prices to move, either up or down, in the future — has surged to its highest in over two years, more than double its level of early July.

In addition, more gold option traders are using puts to hedge against downside risks after the metal failed to extend gains above a record above $1,900 an ounce last week, and for the second time in past three weeks.

Volatility in other markets also affects gold. The CBOE Volatility Index, also known as the Wall Street fear gauge, jumped almost 10 percent to over 40 on Monday.

Early in the session, gold priced in euros rose to a record 1,373.92 euros an ounce as the European currency fell sharply against the dollar and the Japanese yen.

The gold price has risen by a third so far this year and by 22 percent in the third quarter alone, its largest quarterly gain since 1986, driven by a push by investors seeking an alternative to sinking currencies and volatile stocks.

In platinum group metals, platinum fell 1.2 percent to $1,807 an ounce, and palladium fell 3.1 percent to $700.18 an ounce.

Additional reporting by Jan Harvey in London; Editing by Bob Burgdorfer and David Gregorio

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