LONDON, May 9 (Reuters): Gold fell for a third day on Wednesday, touching a four-month low and all but wiping out its gains for the year as the escalation in the euro zone debt crisis prompted investors to favour dollars and German government bonds as safe-havens.
Political disarray in Greece, a change in the French presidency and renewed concern about the resilience of the Spanish banking sector sent the euro to a 15-week low against the dollar and propelled German bond futures to record highs.
Spot gold was down 1.2 percent on the day at $1,585.01 an ounce at 0940 GMT, having lost more than 3 percent so far this week in its largest weekly slide since mid-March.
"It's not as though the escalation of the political risk in Europe is doing anything positive for gold prices at all and this is totally different to how we were between 2008 and 2010, when all the correlations were totally reversed and the weakening of the euro actually led to a strengthening in the gold price," Natixis head of commodity research Nic Brown said.
"This very much suggests that we are not getting demand for gold from European investors. The dymanic is purely from the impact of the crisis on to the FX market and from that, directly on to the gold price," he said.
The gold price is on the verge of wiping out all the gains for 2012 and shows a rise of just 1.4 percent, compared with a year-to-date gain of as much as 14 percent in late February.
This compares with an 8.4 percent advance in the S&P 500 and gains of nearly 10 percent and nearly 6.5 percent in Chinese equities and crude oil respectively in 2012.
FEARS GROW IN EUROPE
In Europe, radical leftist Alexis Tsipras was to meet the leaders of Greece's mainstream parties on Wednesday to try to form a coalition government, after demanding they first agree to tear up the country's EU/IMF bailout deal.
In Spain, Madrid will demand banks set aside another 35 billion euros ($45 billion) against loans to builders, financial sources said, as it battles to rebuild confidence in a sector where huge losses have raised fears the country may need an international bailout.
Nervousness over the worsening situation in Spain sent yields on the benchmark 10-year Obligacion beyond the 6.00 percent threshold that many see as unsustainable in terms of servicing the country's debt burden, thereby further undermining the euro.
The drag of the single European currency on the gold price intensified on Wednesday.
Gold's correlation to the euro, the frequency with which these two assets move in tandem, strengthed to reach a one-week high of +41 percent, meaning gold was more likely to mirror movements in the euro than trade in the opposite direction.
Gold priced in euros fell by 1.1 percent on the day to a four-month low of 1,220.07 euros an ounce.
"Gold seems to be pegged to the euro and this is not going to rally in a hurry either. So all in all, I expect the market to trend lower and would look for a trading range for the next month of 1525-1650," David Govett, head of precious metals at Marex-Spectron, said.