Gold drops 2% after data stirs deflation fears

The metal extended a sell-off that started Wednesday when the Fed ended its policy meeting without launching a new round of monetary easing but instead opted to lengthen its program aimed at lowering long-term interest rates known as "Operation Twist." Silver also slid nearly 4 percent.

Deflation worries pummelled precious metals after reports showing disappointing US manufacturing activity, a shrinking Chinese factory sector and slowing business activity across the euro zone.

The data added to fears that Europe's debt crisis and slower growth in the United States and Asia would cause downturns around the globe.

"The manufacturing data was deflationary. Gold selling accelerated following yesterday's Fed announcement, which was modestly disappointing for those traders who had bought gold in anticipation of more help from the Fed," said Mark Luschini, chief investment strategist of Janney Montgomery Scott, a broker-dealer with USD 54 billion in assets "I can see gold go back down to the mid USD 1,500," he said.

Spot gold was down 2% at USD 1,574.40 an ounce by 12:25 p.m. EDT (1625 GMT), having earlier hit a low of USD 1,566.29 an ounce.

US COMEX gold futures for August delivery were down USD 41.40 an ounce at USD 1,574.40, with trading volume in line with its 30-day average, preliminary Reuters data showed.

Silver dropped 3.6% to usd 27.08 an ounce. An almost 3%-drop in Brent crude oil to a 18-month low and a sharp decline on Wall Street darkened the global economic outlook, lessening the need of buying gold to hedge against inflation. <.N>

Technical selling also pressured bullion prices once they broke below USD 1,580 an ounce, a level of decent support recently. Analysts said the metal could fall further in absence of near-term support.

Weak physical demand also weighed, as bullion gold traders in India kept to the sidelines looking for a bigger retreat in spot prices. The rupee's fall to a record low against the dollar kept prices high in India, the world's biggest consumer of gold.

Prices at 12:25 p.m. EDT (1625 GMT)

LAST NET PCT YTD

CHG CHG CHG

US gold 1574.40 -41.40 -2.6% 0.5%

US silver 27.030 -1.359 -4.8% -3.2%

US platinum 1440.50 -26.30 -1.8% 2.9%

US palladium 609.65 -9.85 -1.6% -7.1%

Gold 1574.06 -31.32 -2.0% 0.7%

Silver 27.08 -1.02 -3.6% -2.2%

Platinum 1437.13 -13.27 -0.9% 3.2%

Palladium 606.17 -8.58 -1.4% -7.1%

Gold Fix 1582.00 -18.00 -1.1% 0.5%

Silver Fix 27.88 -43.00 -1.5% -1.1%

Platinum Fix 1457.00 0.00 0.0% 5.5%

Palladium Fix 617.00 0.00 0.0% -3.0%