Gold prices fell 2% as US dollar rises

Gold prices fell more than two per cent on Tuesday, notching their biggest three-day loss in nearly a year, as deepening fears over Ireland's fiscal health sent the dollar higher against the euro, triggering a second round of broad liquidation across commodities.

While gold earlier this year benefited from safe-haven flows in the euro zone crisis, it has been punished in sync with other commodities lately by investors' need to liquidate positions amid increasing margin calls, a rising dollar and fear of more aggressive tightening measures in China.

Speculative sentiment was also hurt by news that the CME Group, which operates the COMEX futures exchange, had raised gold margins by nearly 6 per cent, the first increase since April. Margins on silver, which were hiked 30 per cent a week ago, rose a further 11.5 per cent.

"There is across-the-board, margin-call type liquidation going on. Investors hit by margin calls know that they can always get liquidity from the gold market to raise capital," said Dennis Gartman, publisher of the investment newsletter The Gartman Letter.

Spot gold fell 1.6 per cent to $US1,338.50 an ounce at 2:55 p.m. EST, having earlier set a two-week low at $US1,329.45. Bullion has showed a cumulative loss of more than five per cent in the past three sessions, its biggest decline since early December.

US December gold futures settled down $US30.10 at $US1,338.40 an ounce in heavy trade, with preliminary Reuters data showing futures volume above 300,000 lots, 70 per cent above the 250-day moving average.

Earlier in the session, the December contract fell as low as $US1,329 an ounce, but prices bounced off key technical support at $US1,330, the contract's 50-day moving average .

Ireland came under intense pressure on Tuesday to request aid over its debt crunch, and a news report said European officials were weighing a rescue package of 80 billion to 100 billion euros for the country and a separate, smaller bailout for its hard-pressed banking sector.

The euro fell to a seven-week low against the dollar on Tuesday amid heightened worries about a deepening euro zone debt crisis, with losses accelerating after prices broke key support levels.

Tuesday's broad sell-off -- the Reuters-Jefferies index fell by more than three per cent for only the second time in the past 18 months -- recalled the rout on Friday, when precious metals were caught up in near indiscriminate selling.

Spot silver held up better than other metals, falling only 0.2 per cent to $US25.38 an ounce, after enduring a much sharper correction last week, with prices having collapsed as much as 15 per cent since margins were first raised last Tuesday.

Gold, which is still up more than 20 per cent this year, has fallen 6 per cent from a record $US1,424.10 one week ago in the broad sell-off that has knocked copper, crude oil and grains, which have in turn suffered from mounting expectations for more monetary tightening in top raw materials consumer China.

Some investors also ratcheted back their expectations of the Federal Reserve's bond-buyback program, or quantitative easing, to stimulate the economy, after a group of Republican economists and executives called on the Fed to drop its plan to buy $US600 billion more in Treasury bonds, Gartman said.

"It looks like people start to question the Fed's monetary policy. It is now questionable whether it will keep QE2 that was already announced," said Shanquan Li, portfolio manager of the Oppenheimer Gold and Special Minerals Fund with total assets of $US4.4 billion.

St. Louis Fed president James Bullard reiterated on Tuesday that the Fed would scale down its program only if there were "hard data" showing a strong improvement in the economy.

Funds cool to gold

Coupled with flows out of hard assets was a cooling towards bullion from some of the world's best-known gold bulls.

The most recent quarterly securities filings showed George Soros cut his exposure to gold in the last quarter, along with Eric Mindich.

Billionaire investor Soros may be cutting back on his gold bets, but he says the precious metal still has some kick to it, as long as conditions like low interest rates prevail.

"The conditions for gold are pretty perfect," he said during a speech in Toronto. "The big negative is that too many people know this and a lot of hedge funds are very exposed ... Gold has a tendency to go parabolic," he added, noting its tendency to fall as quickly as it rises.

Platinum and palladium were both down sharply, ignoring a bullish outlook for the market next year from refiner Johnson Matthey, which said improving supply and demand fundamentals should bring both markets broadly into balance next year.

Platinum fell two per cent to $US1,636.49 an ounce. Palladium was down 4.5 per cent at $639.47, in its third successive daily decline.

Prices at 2:54 p.m. EST.

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