NEW YORK—Gold and other precious metals fell as the chance of credit-rating downgrades in the euro zone kept investors interested in holding cash.
The most actively traded gold contract, for February delivery, was down $23.60, or 1.4%, at $1,710.90 a troy ounce in early trade on the Comex division of the New York Mercantile Exchange.
Gold futures weakened after Standard & Poor's said late Monday that it had placed Germany, France and 13 other euro-zone countries on watch for a possible downgrade as Europe continues to struggle with its battered financial system. Such announcements typically indicate a 50% chance of a downgrade within 90 days.
Some investors buy gold to protect their money from turmoil in other markets. But the risk of a credit crunch in the euro zone has pushed gold prices largely in line with risky assets such as equities and commodities in recent weeks. The worry is that further financial deterioration in the euro zone could spur a rush to cash at the expense of gold and other assets.
"It appears that gold prices are more closely influenced by risk-related trading than by currency-led trading or safe-haven buying," HSBC analyst James Steel said in a note.
"There is still a liquidity squeeze," Mr. Steel said. "Until this eases, gold may stay on the defensive."
Also weighing on gold prices was weak physical buying, market participants said.
"Much of the demand weakness is from India," said Walter de Wet, an analyst with Standard Bank, in a note. He said a weakening Indian rupee had helped push local prices of gold to record highs this month, limiting consumption by the world's top gold jewelry consumer.
Market participants were also cautious ahead of a summit of euro-zone leaders set for Friday. France and Germany have proposed an initiative to enforce budget discipline across the currency union, and the chance of more political and economic turmoil kept potential gold buyers reluctant to increase their holdings of the metal.
Other precious metals also weakened, with the March-delivery silver contract down 1.7% at $31.825 a troy ounce.
Platinum for January delivery fell 1.5% to $1,509.10 an ounce, and March-delivery palladium eased 0.6% to $642.85 an ounce.
