SEPTEMBER 28, 2011, 3:09 P.M. ET.

PRECIOUS METALS: Gold, Silver Topple As EU Fears Drain Optimism

By Tatyana Shumsky
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Gold and silver futures turned sharply lower in the final hour of trading Wednesday as fears about the euro zone's financial future overwhelmed hopes of progress in resolving the region's debt crisis.

Gold prices slid towards the $1,600 level, with the December-delivery contract settling $34.40, or 2.1%, lower at $1,618.10 a troy ounce on the Comex division of the New York Mercantile Exchange.

Meanwhile, silver broke below $30 in after-market trading, though the December contract settled at $30.134 a troy ounce, down $1.402 or 4.5%.

For much of the day, precious metals prices were caught in a tug of war between hopes that Europe would make progress with its debt problems and fears the region's crisis would spin out of control.

But as the day wore on, investors grew increasingly pessimistic again, choosing to sell hard assets in favor of cash, as many fear that euro-zone default will trigger a liquidity crunch.

"Even though we were higher yesterday it's what we call a 'dead cat bounce' ... the disposition of the market since Friday is to go down," said Ralph Preston, market analyst with Heritage West Financial. He added that gold prices may drop as low as $1,575 as selling continues in electronic trading.

Attention now rests with Greece, which is due to resume talks with officials from the European Central Bank, International Monetary Fund and European Commission officials Thursday. The troika of inspectors will review Athens' progress on austerity measures and economic reforms. Earlier this month, discussions were cut short amid a dispute over whether Greece was doing enough to meet its budget targets.

Traders are also watching Germany, which is set to vote on proposals to expand Europe's bailout fund. The measures, which would increase the fund's size to EUR440 billion, must be approved by all 17 members of the currency union though Germany, as the region's largest economy, would have to put up the most in additional funding.

"A lot of traders are just concerned that nobody is going to come up with a good solution [for Europe's debt problems]," said Rob Kurzatkowski, senior commodity analyst with optionsXpress. "The recent selloff was excessive, but at the same time we're not seeing a mad rush of people coming in to buy either."

Silver prices, which declined around 25% this month, are proving particularly sensitive to the negative sentiment. An economic slowdown in Europe would curb demand for silver, which is used in everything from chemical production and glass to high-end electronics.

But retail investors are flocking to pick up silver at cheaper prices despite these fears. Physical silver held by exchange-traded funds has increased by 195 metric tons over the past two days, which more than offset the 95 metric tons redeemed in the previous four sessions, said Barclays Capital analyst Suki Cooper.

"Given the silver market remains in a fundamental surplus, the upside continues to rest with investor interest," Cooper said in a note to clients.

Meanwhile, Nymex platinum for October delivery settled $39.80, or 2.5%, lower at $1,534.20 a troy ounce.

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