Gold drops amid risk aversion after record highs

Gold fell on Wednesday after hitting record highs near $1,630 an ounce, as a broad sell-off of riskier assets prompted bullion investors to take profits amid mounting fears of a U.S. debt default.
Gold initially benefited on news a vote on a deficit reduction plan offered by House of Representatives Speaker John Boehner was pushed back to Thursday from Wednesday amid stiff opposition by his fellow Republicans and Democrats.
Trading volume just partway through the session was the highest since May and was on track to be one of the heaviest trading days of the year as investors focused on the gold market as a safe haven on looming risks of a U.S. default.
Bullion could pull back sharply if a deal to cut long-term U.S. deficit dampen market fears, analysts said. The metal is still up around 8% in July on euro zone debt fears and uncertainty ahead of the August 2 deadline to raise the U.S. debt ceiling.
"With each passing hour of this brinkmanship on the U.S. debt situation, gold becomes more attractive," said Bill O'Neill, partner of commodity investment firm LOGIC Advisors. "However, there is a very definite danger of a quick snapback if the debt talks were to settle very quickly."
Spot gold was down 0.5% at $1,609.89 by 12:34 p.m. EDT (1634 GMT), after rallying to a record $1,628 an ounce.
U.S. gold futures for August delivery were down $5.80 an ounce at $1,610.90. Trading volume already topped 320,000 lots, set to be one of the heaviest sessions in 2011.
Silver was down 1.4% at $40.29 an ounce.
Sharp losses in the U.S. equity markets and industrial commodities such as crude oil prompted investors to take profits in the gold market to cover losses elsewhere, analysts said.
Gold option traders said that more investors are using option strategies to protect their profits made in the underlying gold futures.
"The dealers are definitely buying puts and selling calls," said COMEX gold options floor trader Jonathan Jossen. "When you see these dealers are doing this … they are looking for a move down or just locking in their risks."