Gold fell more than 2 percent on Wednesday as a wave of selling triggered by better-than-expected U.S. home sales and heightened by despair surrounding the eurozone sent prices toward key technical support levels and wiped out year-to-date gains.
Spot prices dropped as low as $1,534.25 an ounce, down 2.15 percent, by 12:08 p.m. EDT (1608 GMT), flirting with a bear market with a drop of 20 percent from September record highs.
Market players are watching whether gold can hold key technical support at $1,525 an ounce.
The sell-off took bullion back to December lows hit in last week's rampant selling and reignited concerns that a recovery in recent days was a "dead-cat bounce," slang used to describe a small, temporary rally that follows a significant decline.
U.S. gold futures for June delivery lost 2.44 percent at $1,538.1.
Bullion was heading for its largest daily drop in two weeks as investors swept money out of the euro and commodities and piled into safer assets such as the dollar and bonds amid concerns Greece will leave the eurozone and doubts about the outcome of a European summit later in the day.
A larger-than-expected rise in U.S. single-family home sales in April struck a further blow to gold, knocking hopes of fresh economic stimulus from the U.S. Federal Reserve.
"The most likely scenario is there will be some kind of progress around the Greek situation, and therefore, these markets will rebound once this happens. But no one knows exactly what the timing is and that is the problem," said Daniel Smith, an analyst at Standard Chartered.
Gold's major headwind has come from its negative correlation to the dollar, a relationship that reached its most negative in a month, meaning a rise in the U.S. currency proves even more damaging to gold than it would have just a week ago.
"Gold is acting more as a risky asset, and everything is tumbling this morning ahead of this (European summit), where nothing good is really expected," Societe Generale analyst Robin Bhar said.
"It is not inconceivable that the meeting could surprise, but going on track records, it's very doubtful," he added.
The summit is expected to discuss growth-boosting proposals and the idea of a joint eurozone bond. French President Francois Hollande supports such a bond plan but German Chancellor Angela Merkel is opposed.
Concerns over the prospect that debt-laden Greece could exit the euro to avoid unpopular austerity measures have grown ahead of June 17 elections, which could hasten the country's departure from the currency bloc if voters back anti-bailout parties.
Gold may encounter some turbulence over the coming trading session ahead of the expiry of monthly U.S. options.
Most open interest, which reflects investor positioning, is located at $1,550.00 and $1,600.00, with a firm bias toward bearish bets on future price movement.
Puts, options that give the holder the right, but not the obligation, to sell a predetermined amount of an asset at a set price by a certain date, outnumber calls, or buy options, by nearly 2:1. <0#GCM2+>
Because the underlying June futures price was trading roughly between $1,550 and $1,600, where most at-the-money open interest was clustered, it was not clear which would exert a greater gravitational pull on the gold price, traders said.
INDIA HURT BY RUPEE
In India, the world's largest gold consumer, demand stayed muted after prices in the local market rose as the rupee fell to a record low, increasing the cost of imports.
The rupee's fall sparked mild intervention from a central bank seen by traders as reluctant to be more aggressive against the strong downtrend.
Gold scrap sales are also rising, analysts said.
"India's scrap gold sales have picked up by 30 percent in the span of just one week as gold prices in local terms surged," HSBC said in a note.
"The rise in gold scrap sales, if it were to continue, may mean India will require lower gold imports than would otherwise be the case. Weak bullion import demand may present headwinds to any near-term gold rally."
Silver was down 2.95 percent at $27.30 an ounce, while spot platinum fell 1.81 percent to $1,412.99 an ounce, its lowest level since early January.
Spot palladium lost 2.49 percent at $591.22 an ounce.
Platinum matched the five-month low of $1,416.70 an ounce it fell to last week as the strong dollar and worries that demand from the European car market would remain weak offset the impact of a strike at the world's largest platinum mine.
Impala Platinum earlier confirmed that its flagship Rustenburg mine, where it is losing 3,000 ounces of production a day, had shut for a second day running because of the latest flare-up in a union turf struggle.
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