PRECIOUS-Gold drops 2.5 pct after data stirs deflation fears

* Biggest 1-day fall since Feb, close to turning lower for
year
* Deflation fears amid selloff in oil, equities weigh
* Disappointing data across the world darkens economic
outlook

(Adds details, new graphic link; updates comment, market
activity)
By Frank Tang
NEW YORK, June 21 (Reuters) - Gold fell 2.5 percent on
T hursday, nearly wiping out this year's gains as renewed fears
of a global economic slowdown and disappointment over a lack of
aggressive U.S. Federal Reserve stimulus dampened bullion's
inflation-hedge appeal.
The metal posted its biggest one-day drop since Feb. 29. Its
selloff started o n W ednesday when the Fed ended a policy meeting
without launching a new round of monetary easing but instead
opted to lengthen its "Operation Twist" program aimed at
lowering long-term interest rates.
Silver slid more than 4 percent, following steep losses on
Wall Street and Brent oil's 3.5 percent drop to below
$90 a barrel. Thursday's selloff in assets across the board
lessened the need for buying gold to hedge against inflation.

Deflation worries pummelled precious metals after reports
showed weak U.S. 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.
"When you see slowdown in China and in the United States and
the debt crisis accelerate in Europe, it leads people to believe
that we will have significant depreciation, especially when
commodities and precious metals prices have been so tied into
the monetary policy," said Jeffrey Sica, chief investment
officer at SICA Wealth Management LLC, which oversees $1 billion
in assets.
Spot gold fell 2.5 percent to $1,566 an ounce by 3:05
p.m. EDT (1905 GMT), having earlier hit a low of $1,563.88,
within 10 cents to turning negative for the year compared with
the 2011 close at $1,563.80 on Dec. 30.
The metal briefly broke below $1,530 in mid-May, and is a
long way off the record high of $1,920.30 an ounce hit last
year.
U.S. COMEX gold futures for August delivery were down
$50.20 an ounce at $1,565.60, with trading volume in line with
the 30-day average, preliminary Reuters data showed.
Silver dropped 4.3 percent to $26.90 an ounce.
Technical selling also pressured bullion prices once they
broke below $1,580 an ounce, a level of decent support recently.
Other analysts are more bullish in the longer term.
CitiFX, Citigroup's technical research unit, said in a note
that gold's current price action resembled a pattern seen
between March 2006 and August 2007 when the metal rallied
sharply after consolidation. It said bullion could steadily rise
to $1,795 an ounce.

FED, EUROPE IN FOCUS
Despite recent weakness, money managers said gold should
eventually benefit from economic uncertainty.
A fear trade because of Europe's inability to resolve its
debt crisis and money printing by central banks will eventually
lead to higher gold prices, Sica said.
Gold was up 15 percent for the year after the Fed in January
pledged to keep interest rates near zero until at least late
2014. Gold has since tumbled several times, however, after Fed
Chairman Ben Bernanke mentioned no further quantitative easing
or asset buybacks in his congressional testimonies.
Platinum group metals also fell. Platinum was down
1.1 percent at $1,434.90, while palladium dropped 2 percent to
$602.78.

3:05 PM EDT LAST/ NET PCT LOW HIGH CURRENT
SETTLE CHNG CHNG VOL
US Gold AUG 1565.50 -50.30 -3.1 1564.80 1608.20 193,164
US Silver JUL 26.839 -1.550 -5.5 26.800 28.070 64,423
US Plat JUL 1438.60 -28.20 -1.9 1431.50 1462.40 9,732
US Pall SEP 608.55 -10.95 -1.8 606.00 620.80 3,338

Gold 1566.00 -39.38 -2.5 1564.90 1606.68
Silver 26.900 -1.200 -4.3 26.900 28.100
Platinum 1434.90 -15.50 -1.1 1436.75 1459.25
Palladium 602.78 -11.97 -1.9 607.00 618.25

TOTAL MARKET VOLUME 30-D ATM VOLATILITY
CURRENT 30D AVG 250D AVG CURRENT CHG
US Gold 198,721 212,369 197,089 21.29 0.51
US Silver 86,508 50,266 53,001 29.73 -0.12
US Platinum 12,572 9,644 8,107 23 0.00
US Palladium 3,345 5,692 4,486

(Additional reporting by Jan Harvey in London; Editing by
Marguerita Choy and Dale Hudson)