Gold drops to 2-week lows as dollar rallies

NEW YORK/LONDON (Reuters) - Gold fell to a two-week low in heavy trade on Thursday, slipping below $1,000 an ounce as the dollar rallied amid a wave of risk aversion, decreasing the appeal of gold as a currency hedge.

Gold prices tumbled in a sell-off triggered by the dollar's rise after major central banks including the U.S. Federal Reserve announced plans to scale back emergency lending.

On Tuesday, gold was trading at $1,020 an ounce, within sight of last week's 18-month high of $1,023.85 and the March 2008 historic peak at $1,030.80.

"We went into a lot of resistance at $1,020 an ounce. Everybody was too bullish for gold, but I think it's just a minor correction," said Bruce Dunn, vice president of trading at New Jersey-based Auramet Trading.

Dunn said some selling was related to expirations of COMEX options and month-end position squaring.

U.S. December gold futures settled down $15.50, or 1.5 percent, at $998.90 an ounce on the COMEX division of New York Mercantile Exchange.

The contract hit an intraday low of $991.30, the weakest price since September 10.

Spot gold was at $995.30 at 3:14 p.m. EDT, compared with $1,007.05 late in New York on Wednesday.

The dollar index .DXY jumped more than 1 percent against a basket of major currencies. Gold is generally used as a hedge against the depreciation of dollar-denominated portfolios.

"The dollar bounced back and gold rose," said Michael Kempinski," a trader at Commerzbank. "It's a healthy correction. ... Some investors were disappointed that gold hasn't broken higher, but it did rise too fast."

Traders said falling crude prices were also weighing on gold, used as a hedge against inflation, which is often triggered by rising oil prices. U.S. crude futures fell nearly $3 to under $66 a barrel.

UNDERLYING SUPPORT

Some analysts said gold would draw support from resilient demand in the physical market in Asia.

"Despite high prices physical demand seems to be recovering a bit," said Eugen Weinberg, an analyst at Commerzbank. "Together with higher investment interest, it's providing a good picture."

The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said its holdings stood at 1,101.735 tonnes as of Sept 23, unchanged from the previous business day.

Among other precious metals, silver slipped to $16.27 from $16.71, platinum declined to $1,299 from $1,318.5 and palladium dipped to $290 from $292, its previous session close.

Traders said precious metals and other asset markets were waiting for the conclusions from the G20 summit in Pittsburgh on Thursday and Friday.

The timing for plans to unwind emergency economic support is a key issue for investors as the G20 leaders seek ways to nurture the recovery from the recession and build safeguards against future catastrophes.

(Additional reporting by Pratima Desai in London; Editing by David Gregorio)