Gold fell for the first time in three days Wednesday as a dollar rally, tamer inflation data and year-end book-squaring more than offset safe-haven buying after ratings agency Moody's said it may downgrade Spain's debt rating.
The dollar rose nearly 1 percent against a basket of major currencies as U.S. data showed a steady recovery in New York state's manufacturing sector. A mild gain in U.S. consumer prices also reduced bullion's appeal as a hedge against long-term inflation.
Renewed contagion risks from the euro zone debt crisis failed to drive gold higher after Moody's placed Spain's Aa1 ratings on review for a possible downgrade, a reminder that fiscal problems in Europe are far from over.
"There wasn't aggressive safe-haven buying to push the market up. It's the end of the year and many books are closed. People have had huge profits for the year and they decided to book them now," said COMEX gold options floor trader Jonathan Jossen.
Spot gold fell 0.7 percent to $1,385.60 an ounce at 2:13 p.m. EST (1913 GMT). U.S. gold futures for February delivery settled down $18.10 at $1,386.20.
Spot silver dropped 1.2 percent to $29.04 an ounce.
Year to date, silver's 72 percent gain still sharply exceeded gold's rise of 26 percent, as the gold/silver ratio held near its lowest level in four years at 47.
COMEX gold and silver futures volume were both about 40 percent below their 30-day averages, preliminary Reuters data showed. Volume tends to dwindle toward the year-end as some major trading desks and funds have already closed their books.
Investment demand in the white metal remained strong. iShares Silver Trust, the world's largest silver-backed ETF, said its holdings hit a record high at 10,964.14 tons on Dec. 14.
Banks' commodity businesses were still in the spotlight after reports that JPMorgan had amassed a larger long position in copper and was unwinding a big silver short.
The Moody's news on Spain fueled concern over the scale of some euro zone countries' debt, after Greece and Ireland struggled with their finances earlier this year. This helped drive gold to a record $1,430.95 an ounce earlier this month.
Some budget experts also fear the United States will face a Greece-style debt crisis over the coming decade if it does not bring down budget deficits which hit 9.9 percent of GDP in fiscal 2009.
"The unease generated by ever-growing budget deficits is negative for the U.S. dollar and supportive of gold," HSBC said in a note. "A lack of confidence in the government's willingness to cut the deficit is an important component in the gold rally."
TREASURY YIELDS RISE
Credit Suisse analyst Tom Kendall said the concern about euro zone stability and debt will continue into the first quarter of next year, supporting gold.
"The yields on the 10-year (U.S. Treasury) has come up almost 40 percent from the yield low and gold is still trading either side of $1,400. I think that's a very reassuring performance."
Sharply higher U.S. government bond yields, seen as a proxy of short-term interest rates, have recently drawn investors away from gold buying.
Treasury yields, which move in the opposite direction to prices, have risen on a market view that a combination of fiscal and monetary stimulus would push growth higher in the first half of next year.
On Wednesday, benchmark Treasury prices turned lower after rising earlier in the session.
The world's largest gold exchange-traded fund, the SPDR Gold Trust, said its holdings fell by just over 3 tons on Tuesday.
Platinum fell 0.5 percent to $1,696.49 an ounce, and palladium dropped 1.5 percent to $746.97.
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