By: Tom Jennemann

New York 21/12/2011 - Gold on the Comex division of the New York Mercantile Exchange erased earlier gains on Wednesday after the initial optimism over the European Central Bank's three-year funding to EU banks soured.

Gold futures for February delivery were last down $4.00 at $1,613.50 per ounce, well off the overnight high of $1,643.70.

The ECB allotted 489.19 billion euros ($643.1 8 billion) in the first round of its three-year loan programme, it said on Wednesday, which was much higher than the 300 billion in euros that investors has expected.

“I'm not buying the argument that this larger-than-predicted outlay reflects that the banks' balance sheets are materially worse than previously thought,” a US-based fund trader said." Of course these banks were going to take as much as they could [from the ECB] because it would be dumb to turn away ultra-cheap money."

“The real reason that equities are selling off is that the markets realize that there's no clarity about how this money is being spent,” he added. "The hope was that a portion of this low-cost cash would flow in to peripheral bond markets but that simply isn't happening."

Italian 10-year notes actually rose 16 basis points to 6.77 percent, while Spanish yields are up 20 basis points at 5.27 percent since the release of the ECB report, he noted.

Meanwhile, the euro fell back to 1.3053 against the US dollar, while the Dow Jones industrial average and S&P 500 were off by 0.23 percent and 0.35 percent respectively.

“The [ECB] has loaned these banks nearly a half trillion [euros] and gold and stocks are trading down this morning,” the fund manager said. “That's a strong statement that this is not the solution to the liquidity squeeze."

"The banks obviously can't be expected to t backstop the [eurozone's] debt. At the end of the day, only the ECB can do that,” he added.

In US data, US existing home sales increased four percent in November on the previous month to an annual rate of 4.42 million units - well below expectations of 5.04 million. Also, October's sales figure was revised down to a 4.25 million unit rate from 4.97 million.

As for the other precious metals, Comex silver for March delivery was down 18.6 cents at $29.350 per ounce. Trade has ranged from $29.130 to $30.210.

Platinum futures for January delivery on the Nymex were down $5.60 at $1,427.30 per ounce, while the March palladium contract was at $629.80, down $1.20.


(Editing by Mark Shaw)