Reuters

By Josephine Mason
NEW YORK | Wed May 23, 2012 5:02pm EDT

(Reuters) – Gold managed to recover most of the ground it lost in a brutal sell-off earlier on Wednesday even as sentiment and the euro remained fragile as European leaders met to discuss the deepening euro-zone debt crisis.
Gold tested key support levels for a second time in a week as a wave of selling hit commodities, the euro and equities, before bouncing off those lows in New York afternoon trading.
Money had piled into bonds and the dollar, assets considered low risk, on Wednesday ahead of a meeting of European Union leaders later in the day. The leaders are expected to discuss growth-boosting measures and the idea of a joint euro zone bond.
Spot gold prices dropped as low as $1,534.25 an ounce, down over 2 percent, as the euro slumped to its weakest against the dollar in nearly two years. By 4:14 p.m. EDT (2014 GMT), the loss narrowed to down 0.41 percent at $1,561.50 an ounce.
U.S. gold futures for June delivery settled at $1,548.4 per ounce, down 1.76 percent from Tuesday, but off an intraday low of $1,532.
The move off lows came after news that euro zone officials have told members of the currency area to prepare contingency plans in case Greece decides to quit the bloc, an eventuality Germany’s central bank said would be “manageable.”
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.
While the ramifications of a Greek exit are unknown, it would at least be some decisive action towards resolving the crisis, which could give investors the direction they’ve been looking for, traders said.
Later in the day, the market showed more resilience to a larger-than-expected rise in U.S. single-family home sales in April that had knocked hopes of fresh economic stimulus from the U.S. Federal Reserve.
But while the bulls were encouraged to see gold hold above the $1,525 per ounce mark, bullion remains on weak ground while the market is in risk-off mode, analysts said. The market also fell through a 20-month moving average level earlier in the day.
A break below $1,525 would send prices back to the mid to high $1,400s, according to chief executive of  Sarhan Capital, Adam Sarhan.
“The more it breaks down below these key areas, the more it strengthens the bearish case,” said Sarhan, who is short the euro and long bonds.
Wednesday’s see-saw trend was similar to last week’s action.
The intraday lows had again wiped out all of gold’s year-to-date gains and sent it briefly into bear territory, down 20 percent from the September highs. That has reignited concerns that the recovery in recent days was a “dead-cat bounce”, slang used to describe a small, temporary rally that follows a significant decline.
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 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 and $1,600, 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.
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.
Gold’s losses took the rest of the precious market with it.
Silver was down 1.10 percent at $27.82 an ounce, while spot platinum fell 1.27 percent to $1,420.74 an ounce, after hitting lows last seen in early January. Spot palladium lost 2.28 percent at $592.50 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 (IMPJ.J) 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.
(Editing by Dale Hudson and Bob Burgdorfer)
URL: http://www.reuters.com/article/2012/05/23/us-markets-precious-idUSBRE8390RW20120523