Gold Prices Fall Below $1,630 On Euro Zone Worries

(REUTERS) -- Gold prices slid below $1,630 an ounce on Monday as concerns that the euro zone debt crisis could ensnare higher-rated countries hurt the single currency, though moves were muted ahead of this week's Federal Reserve meeting.

The metal is extending the 2 percent losses it has posted so far this month, in line with a drop in the euro. The currency has come under heavy pressure from growing fears over the ability of some euro zone countries, particularly Spain, to manage debt.

Spot gold was down 0.7 percent at $1,629.69 an ounce at 7:53 a.m. EDT (1153 GMT), while gold futures for June delivery were down $11.80 an ounce at $1,630.90.

We are basically caught between two opposing factors, Credit Suisse analyst Tobias Merath said.

On the one hand, we have U.S. bond yields coming off, which adds some support, but concerns over Europe are capping the upside, because the situation in Europe has the potential to lead to deteriorating liquidity conditions.

As we saw at the end of last year, gold is a hedge against all kinds of crises, but not against a liquidity problem, when people are liquidating assets to raise much-needed cash. They also sell gold in this environment.

Prices will struggle to break out of their current range without fresh drivers, he said.

Gold watchers are turning their attention to the Federal Reserve's two-day policy meeting from Tuesday, at which the prospect of more monetary easing is set to be addressed.

The euro fell against the dollar, having drawn little support from news at the weekend that the International Monetary Fund would receive a further $430 billion to safeguard economies from the euro zone debt crisis.

Worries over the euro zone's financial health were apparent in the debt market. Dutch and peripheral euro zone bonds sold off, driving Spanish yields back above 6 percent, as a political crisis in the Netherlands stoked investor fears euro zone commitments to contain the debt crisis were under threat.

German Bund futures hit record highs and French bonds slipped as investors worried that a potential presidential election win by the French Socialists would compromise the euro zone's commitment to fight its debt crisis.

The premium investors demand to hold Dutch 10-year government bonds rather than German Bunds rose to a three-year high on Monday as the country slipped into political crisis after a failure to agree on budget cuts. EUR>

Concerns over euro zone debt were a key factor pushing gold to record highs last year, but the dollar has since taken over as investors' safe haven of choice. Bad news from the bloc now tends to pressure gold, which falls in line with the euro.

WORK TO DO

Gold still has a lot of work to do to convince investors that it has made up its mind on which hat it wants to wear - safe haven or risk, UBS said in a note on Monday.

For full-fledged safe-haven status to resume, gold will need to consistently exhibit the ability to outperform in a risk-off scenario and lag during a risk rally - shifts in risk appetite as the situation in Europe unfolds would present gold with this opportunity.

Physical gold demand remained light in major consumer India even ahead of the Akshaya Tritiya festival on Tuesday, an auspicious day to buy gold.

Buying is being hurt by weakness in the rupee, which makes dollar-priced gold more expensive for local buyers.

In New York last week, money managers raised their net long positions in gold futures and options to 112,275 contracts, from 109,511 contracts a week earlier, its lowest in more than three years.

While the net length in gold had fallen more than 40 percent from this year's peak hit in early March, the total open interest edged lower from a week earlier to 640,791 contracts, down 13 percent from March and near a two-year low hit earlier in the month.

Among other precious metals, silver was down 2.1 percent at $31.00 an ounce, spot platinum was down 0.9 percent at $1,558.75 an ounce and spot palladium was down 1.1 percent at $663.97 an ounce.

Data from Chinese customs authorities on Monday showed its platinum imports rose by nearly a third last month to their highest since December at 7,446 kgs, while palladium imports have fallen to their lowest since December 2009.

China's silver imports, at 255,455 kg, were down by a third year-on-year, but still at their highest in six months.