Gold falls below $1,600 in Asia

SAN FRANCISCO (MarketWatch) � Gold futures settled higher Tuesday, as steep declines in Spanish and Italian bonds, the potential for contagion of financial woes in the euro zone and growing expectations for further global economic stimulus helped prices tally a three-session gain of 1.6%.

Gold for August GCQ2 �delivery rose $17, or 1.1%, to settle at $1,613.80 an ounce on the Comex division of the New York Stock Exchange. Prices had already tallied a gain of $8.80, or 0.5%, over the past two sessions.

Click to Play Spanish banks claim they don't need bailout

A number of Spanish banks say they don't need state aid just two days after the Spanish government announced a �100 billion ($125 billion) bailout to save the sector. WSJ's David Enrich assesses their claim. (Photo: Getty Images)

Silver for July SIN2 � delivery also settled up 33 cents, or 1.2%, to $28.95 an ounce after posting a 0.5% climb in the previous session.

�It�s mostly just continued concern pushing into gold as Spanish yields hit new highs,� said Tom Essaye, editor of the 7:00�s Report, a daily commentary on equity and commodity markets and the economy. �It�s a bit of a crisis hedge trade.�

On Tuesday, the yields on Spanish and Italian bonds spiked, pushing up the cost of insuring the country�s debt. Yields move inversely to bond prices. Read Europe Markets.

U.S. Treasury prices fell, erasing the prior session�s rally and sending bond yields higher. Read more on U.S. bonds.

Potential government action to stop the drop in bonds, such as monetary easing or quantitative easing, would be a �good thing� for gold, said Christopher Ecclestone, a mining strategist at Hallgarten & Co.

Gold also found support after Federal Reserve Bank of Chicago President Charles Evans said in an interview aired on Bloomberg Television that he�s effectively in favor of �any accommodative policy.�

/quotes/zigman/676896 GCQ2 1,573.10, +7.60, +0.49% /quotes/zigman/690082 SIN2 26.82, -0.02, -0.07%

�Of course,� said Brien Lundin, editor of Gold Newsletter, �Evans is a legendary dove on monetary policy, and he�s currently not a voting member [of the Federal Open Market Committee], so this isn�t a lot to pin gold�s price spike on.

�But it�s also a sign of how sensitive gold is right now to any mention of quantitative easing, or lack thereof, by Fed officials,� Lundin said.

�We�ll see a shift in rhetoric well before we see an actual policy move by the Fed,� he said. �Speculators are well aware that QE1 and QE2, in the wake of a similar crisis in 2008, sent gold up over 160%. They�ll jump en masse into gold on any rumored or confirmed move by the Fed toward additional QE.�

Euro zone �fire line�

At the same time, investors remained concerned over the potential spread of the debt crisis in Europe ahead of elections in Greece on Sunday.

�I believe the fear is centered on where does the euro-debt crisis create a barrier between the financially stable economies and those which must restructure their obligations and debts,� said Jeffrey Wright, managing director at Global Hunter Securities.

�Until this �fire line� is widely accepted, gold will be viewed as a safe haven,� he said.

At the same time, there are continuing worries that �the sovereign debt of Spain will still be stretched to the breaking point and Greece�s possible departure from the euro will unleash more instability in the region,� said analysts at GoldCore, in a daily note.

�The risk of contagion remains real, and European finance officials have discussed limiting the size of withdrawals from ATM machines, imposing border checks and introducing euro-zone capital controls as a worst-case scenario should Athens decide to leave the euro,� they said.

Reuters Traders in the silver and gold options pit on the floor of the New York Mercantile Exchange.

Rounding out action among the major metals Tuesday, July platinum PLN2 �closed at $1,454.40 an ounce, up $5.10, or 0.4%, while September palladium lost 90 cents, or 0.1%, to $624.25 an ounce.

July copper HGN2 �fell less than 1 cent, or 0.2%, to $3.34 a pound.

For base metals, the demand outlook is �likely to continue to weigh on prices, but supply-side issues, such as lower output in China, may start to underpin prices for most of the metals except copper,� said William Adams, head of research at metals-data provider FastMarkets.

�However, if broad market sentiment continues to deteriorate and more risk is taken off the table, then further downward moves cannot be ruled out in the [base] metals,� he said in a daily note. �Indeed it may take such a development to prompt more cutbacks in the world [excluding] China.

�For now we feel rallies will continue to attract selling.�