Gold Falls as Debt Worries Deepen

Gold fell more than 1 percent on Friday, breaking below key support levels as the dollar extended gains against the euro, which came under pressure as concerns over euro zone debt came back to the spotlight.

Spot gold fell to a one-week low at $1,525.74 an ounce and was bid at $1,528.04 an ounce at 1406 GMT, against $1,543.60 late in New York on Thursday. U.S. gold futures for August delivery fell $13.90 to $1,528.80.

Prices drifted lower throughout the morning, with its decline accelerating after it broke through chart support around $1,537 an ounce. The euro was hurt by a Standard & Poor's statement that France may lose its top-notch AAA debt rating in the long term.

"We have very, very technical trading today," said VTB Capital analyst Andrey Kryuchenkov. "We breached the 10-day moving average (at $1,537)."

"The dollar is stronger, which is a reason to start taking profits here, but I don't think we will go much further than $1,520," he said.

Talk of large-scale official sector selling, which later proved unfounded, also accelerated the drop, traders said.

While gold is on the defensive, persistently low interest rates, concerns over euro zone debt and the weak outlook for the U.S. economy all count in its favour longer term, analysts said.

Gold remains within the $1,520-1,555 range it has broadly stuck to this month as the markets wind down for the typically quieter summer months.

While in the longer term it is likely to make fresh highs, gold is set to consoldate, or even pull back, in the immediate future, analysts said.

SHORT-LIVED PULLBACK EXPECTED

"We are bullish on gold's prospects for the rest of this year, but would not rule out a pullback over the summer months," Swiss bank UBS said in a note on Friday.

"There are three major reasons why we think gold could reverse: the end of the Fed's QE2, the traditional seasonal slowdown, and the potential for gold prices to tumble during an extreme risk-off event when cross-asset correlation is high."

The bank said any correction was likely to be short-lived, however. It cut its one-month forecast for the precious metal to $1,475 an ounce from $1,500, but raised its three-month forecast to $1,600 from $1,400.

Sterling-priced gold meanwhile rose to a record 951.78 pounds an ounce as the underlying price of the precious metal remained supported while sterling fell after disappointing UK industrial output data.

"Both the euro and sterling denominated bullion prices outperformed the (dollar) benchmark on the LBMA yesterday," said VTB Capital analyst Andrey Kryuchenkov in a note.

Silver was at $36.54 an ounce against $37.53. The gold:silver ratio -- the number of silver ounces needed to buy an ounce of gold -- which has steadied broadly between 40 and 45 since early May after hitting 28-year lows in April, held near 41 on Friday.

Platinum was at $1,820.49 an ounce against $1,836.85, while palladium was at $804.97 against $813.08.

The metals, chiefly used in autocatalysts, are expected to firm this year as car sales improve after a poor 2009 and 2010, but prices will be sensitive to signs the auto industry is continuing to struggle.

Toyota Motor Corp (NYSE:TM), the world's biggest carmaker, forecast a larger-than-expected 35 percent fall in annual profit on Friday and warned the strong yen was making it difficult to justify keeping production in Japan.