Gold, silver decline on strengthening dollar

Gold and silver fell in London as a strengthening dollar diminished their appeal as a hedge against a weaker US currency and investors sold the metals to cover their losses as stock markets tumbled.

The euro fell to a three-week low against the dollar and a 20 per cent drop in the Dow Jones Stoxx 600 Index from its June high signaled European stocks were in a bear market.

"The major driver is the dollar," Alexander Zumpfe, a precious metals trader at Hanau, Germany-based Heraeus Metallhandels, said.

"There's a weakness across the equities markets. Some money is leaving the commodities markets, including metals and oil, to cover losses."

Gold fell $8.77, or 1 per cent, to $874.40 an ounce as of 10:48 am in London. Gold gained 31 per cent last year. The metal reached a record $914.30 an ounce in London on January 14.

Silver for immediate delivery fell 23 cents, or 1.4 per cent, to $15.93 an ounce.

Gold futures for February delivery dropped $7.30, or 0.8 per cent, to $874.40 an ounce in electronic trading on the Comex division of the New York Mercantile Exchange.

Hedge funds are probably behind the redemptions, John Reade, an analyst at UBS in London, said in a report on Monday. ``If gold falls further, as we suspect is likely in the near term, there may be more potential further redemptions.''

Hedge-fund managers and other large speculators increased their net-long position in New York gold futures in the week ended Jan. 15, according to US Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 212,047 contracts, the Washington- based commission said. Net-long positions rose by 6,643 contracts, up 3.2 per cent from a week earlier.

"Given the continued slowdown in the U.S. housing market and fears that this will drag the US into a recession it seems investors are still seeking to build some form of protection into their portfolios," James Moore, a precious metals analyst with TheBullionDesk.com, wrote in a report.

Platinum for immediate delivery fell $5.25, or 0.3 per cent, to $1,553.75 an ounce. Palladium for immediate delivery declined $1.25, or 0.3 per cent, to $368.25.

Traders, investors and analysts surveyed by Bloomberg from Mumbai to New York forecast that gold would rise this week on speculation a US recession will boost demand for the precious metal as an alternative investment.