PRECIOUS-Gold steadies around $1,040, ETF dips 2nd day in row

* Gold may consolidate on possible short-term USD strength
* SPDR Gold holdings fall 1.22T,down 2nd straight day[GOL/SPDR]

By Chikako Mogi

TOKYO, Oct 28 (Reuters) - Gold prices steadied around $1,040
an ounce on Wednesday, recovering from three-week lows hit the
day before when the dollar strengthened against the euro.

The dollar held gains against a basket of currencies on
Wednesday while the yen rose, as investors trimmed positions in
higher-yielding currencies as stocks fell on weaker-than-expected
U.S. consumer confidence figures.

The euro moved away from 14-month highs hit against the
dollar on Monday as investors also cut back on euro long
positions after seeing the pace of its recent rise had been too
fast. [FRX/]

Dollar weakness was the main driver for gold's rally when
bullion rose above $1,072 earlier this month, as a drop in the
dollar makes bullion less expensive for non-dollar holders. Gold
is also preferred as a hedge against inflation as well as a
depreciating dollar.

Traders and analysts said that given the rapid rise in gold
prices, a pause in its rally was sensible, but the expected
continuation of dollar weakness will also likely offer firm
support around $1,000.

"I think the negative correlation (between gold and the
dollar) will continue," said David Barclay, commodity strategist
at Standard Chartered in Hong Kong.

"There is the potential for a short period of dollar strength
and subsequent consolidation for gold, but this will be temporary
as we see the euro/dollar at $1.55 by year end," he said.

Spot gold XAU= inched up 0.1 percent to 1,040.4 an ounce as
of 0300 GMT compared with New York's notional close of $1,038.8.
Gold hit a three-week low of $1,032.25 on Tuesday.

As noncommercial net long futures positions stayed near
record highs, profit-taking could cause a little correction to
the gold market, but it would be a "healthy development," Barclay
said, adding that even if the market fell further, it would still
be in a strong technical uptrend with support around $1,000.

U.S. gold futures for December delivery GCZ9 were up 0.6
percent at $1,041 an ounce, compared with $1,035.40 on the COMEX
division of NYMEX.

Gold futures fell to a three-week low of $1,032.9 on Tuesday
to find support just above $1,030 an ounce, the long-standing
record high it passed on Oct. 6.

Barclay said he did not believe news of financial distress
would benefit gold as it did in the first three months of 2009.

"What's driving gold now is liquidity driven moves higher in
risky assets which are weighing on the dollar and creating
concerns over future inflation," he said.

With the market consolidating, holdings at the world's
largest gold-backed exchange-traded fund, the SPDR Gold Trust
(GLD), fell to 1,105.654 tonnes as of Oct. 27, down 1.22 tonnes
or 0.1 percent from the previous business day. It was the second
consecutive day of declines. [GOL/SPDR]

Weakness in gold weighed on other precious metals on Tuesday,
with spot silver XAG= falling to a three-week low of $16.47.
Silver was at $16.70 on Wednesday.

Platinum XPT= also touched a three-week low of $1,305.50 an
ounce on Tuesday, and traded at $1,316.5 on Wednesday.

Precious metals prices at 0311 GMT
Metal Last Change Pct chg YTD pct chg Turnover
Spot Gold 1040.10 1.30 +0.13 18.17
Spot Silver 16.69 0.04 +0.24 47.44
Spot Platinum 1317.50 5.50 +0.42 41.36
Spot Palladium 328.00 2.50 +0.77 77.78
Euro/Dollar 1.4805
Dollar/Yen 91.32
TOCOM prices in yen per gram, except TOCOM silver which is
priced in yen per 10 grams. Spot prices in $ per ounce.
(Editing by Chris Gallagher)