Gold extends fall, spooked investors seek dollars

A salesman arranges gold necklaces at a jewellery shop in downtown Riyadh December 2, 2009.

LONDON (Reuters) - Gold prices dropped more than 1 percent on Tuesday to a session low of $1,142.30 an ounce, with risk aversion fuelling broad dollar gains after ratings agency Fitch downgraded Greece's credit rating.

Spot gold was bid at $1,149.85 an ounce at 1653 GMT, against $1,156.90 late in New York on Monday. In that session it fell to a two-week low of $1,135.80, having touched a record high of $1,226.10 just last week.

The dollar strengthened against the euro, with the single currency feeling the pinch as investors worried about Greece's fiscal health after Fitch downgraded the euro zone member's credit rating.

Traders attributed gold's decline in the last three sessions from record highs to a recovery in the dollar after better than expected U.S. non-farm payrolls data for November lifted hopes that the world's biggest economy may be stabilizing.

"What happens to gold from here will be determined by two factors -- whether we see a continued recovery in the dollar, and whether the recent concerns over the creditworthiness of the major sovereign countries continue to subside," said Nic Brown, senior analyst at Natixis.

Strength in the U.S. unit dents gold's appeal as an alternative asset and makes dollar-priced commodities more expensive for holders of other currencies.

For a graphic showing gold's correlation with the dollar, click: here

An unexpected 1.8 percent month-on-month fall in Germany's industrial output in October also weighed on the euro, while persistent concerns about Dubai's debt woes pushed investors to seek the safety of the dollar.

Commerzbank analyst Eugen Weinberg said gold was vulnerable to a further recovery in the U.S. currency.

"Should the dollar strengthen in the coming days, it would be very difficult for gold prices to hold at current levels, because it would take one of the most important arguments (for buying gold) away from the market," he said.

U.S. gold futures for February delivery on the COMEX division of the New York Mercantile Exchange fell $12.90 to $1,151.10 an ounce.

FORECASTS RAISED

HSBC raised its gold price forecasts for 2009 to $990 an ounce from $925 previously, and said it sees prices at $1,150 an ounce next year, against $950 previously.

"Ongoing accomodative U.S. monetary and fiscal policies may lend further support to gold," the bank said in a note.

Elsewhere, an official Chinese newspaper said on Tuesday China should increase the proportion of gold in its foreign exchange reserves to ensure the safety of its overall portfolio.

Expectations for further central bank diversification into gold is supporting investment in the metal, analysts said, and the recent price dip may encourage this.

Among other precious metals, silver was bid at $17.92 an ounce against $18.16, platinum at $1,441 an ounce against $1,438.50 and palladium at $373.50 against $371.

Traders in autocatalyst materials platinum and palladium are looking for fresh signs of recovery in the beleaguered automotive market for clues as to the future strength of demand.

Official data on Tuesday showed China's passenger cars sales in November rose 98 percent from a year earlier.

(Editing by Anthony Barker)