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Gold down $10 on firm US dollar, weaker oil

Gold fell more than 1% after the dollar bounced against the euro, erasing some of the metal's appeal as an alternative investment, with falling oil prices also adding to selling pressure.

Gold has been volatile this week, hitting its highest in almost two weeks at $908.70 an ounce on Monday before falling to a four-week low of $864.15 the following day on weaker oil prices and expectations of higher US interest rates.

Gold fell to $871.20/872.30 an ounce from $881.15/882.55 late in New York on Wednesday. Gold has dropped more than 15% since its record $1,030.80 in mid-March.

“We've got a large short short position in oil which could be squeezed. If that's the case, it'll drag gold prices lower with it,” said Mark Pervan, senior commodities analyst with ANZ in Melbourne.

“Gold is left at the whim or direction of what happens in the oil and currency markets at the moment. It's lagging rather than leading,” he said.

Oil dropped nearly $1 on Thursday, reversing some of the previous day's $5.07 gains on a drawdown in US crude oil inventories, but worries about supplies lingered. In theory, lower oil prices reduce gold's appeal as a hedge against inflation.

The dollar inched up against the euro, underpinned by the Federal Reserve's tough talk this week about containing inflation that has spurred expectations for higher interest rates.

“I get a feeling that when you look at the dollar direction, it's certainly starting to form a bottom. I think the market is concerned about the dollar starting to firm,” said Pervan.

Gold could find support at $855 an ounce, which if broken could drag prices down to $800. Resistance was pegged at $900, he said.

Gold futures for August delivery on the COMEX division of the New York Mercantile Exchange fell $8.1 an ounce to $874.7.

“We are just watching the dollar. That's all,” said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong, who expected gold to trade in a tight range of $875-$885.

Jewelry makers and other physical buyers were on the sidelines, having bought gold at around $865 earlier this week, said Leung. “I think the money is going to the oil market. It's more exciting.”

The most active Tokyo platinum contract for April 2009 delivery on the Tokyo Commodity Exchange fell ¥59 per gram to ¥6,796.

Spot platinum fell to $2,006.00/2,016.00 an ounce from $2,032.50/2,052.50.

Platinum powered to an all-time high of $2,290 an ounce in early March due to supply worries after a power shortage disrupted mining in main producer South Africa. The price has since corrected, mainly due to profit taking. (Reuters)