Gold falls after 6-day rally as dollar rises

NEW YORK Fri Aug 20, 2010 4:44pm EDT

NEW YORK (Reuters) - Gold fell on Friday, snapping a six-day winning streak, as a sharp rise of the dollar prompted bullion investors heading into the weekend to lock in profits from the third straight week of gains.

Gold rose more than 1 percent this week, its first three-week rally since June.

Spot gold was at $1,227.45 an ounce at 4:17 p.m. EDT, down slightly from $1,230.10 late in New York on Thursday. U.S. gold futures for December delivery settled down $6.60 at $1,228.80.

On Thursday, gold rose to a high of $1,237.15 an ounce, the highest price since July 1, as its appeal as an alternative investment got a boost from data showing new claims for U.S. employment benefits unexpectedly climbed to a nine-month high.

"Investors are looking for asset preservation, as they move back into gold as the overall outlook for U.S. economy starts to fade," said Frank McGhee, head precious metals trader at Chicago-based Integrated Brokerage Services.

But the flight to quality gave way on Friday to liquidation across asset classes from stocks to industrial commodities such as crude oil and base metals, McGhee said.

Also, the dollar rose sharply against the euro on Friday, which dented demand for gold, traders said. Weak stock markets also hit gold. As Wall Street fell sharply for a second day, some investors sold gold to cover margin calls. The S&P 500 index has dropped almost 3 percent since Thursday. .N

The greenback rose broadly on risk aversion, concerns about the global economy and comments by a senior European Central Bank official that raised expectations the central bank will keep monetary conditions loose for some time. <FRX/>

Gold has been resuming its traditional inverse correlation with the dollar and a positive link with the euro, analysts said. The 25-day correlation between gold and the dollar fell to a plus 0.2 on Thursday, sharply lower than a high of near 0.9 earlier in August.

(Graphic: link.reuters.com/jyx36n)

Still, the dollar and gold have both benefited from safe-haven flows at times. Gold can break its usual inverse correlation with the dollar in times of extreme risk aversion.

Gold priced in euros benefited from the single currency's slip, rising nearly 1 percent to a 1-1/2 month high at 969.74 euros an ounce.

The closely watched gold-to-oil ratio, which shows how many barrels of oil an ounce of gold can buy, was at 16.7 on Friday, rising toward its highest level of the year. The ratio was still well below its high of near 30 in early 2009.

(Graphic: link.reuters.com/taz36n)

Some investors make allocation changes according to movements of ratios between commodities.

While gold has been rising, oil prices ended lower for a third day in a row and down for a second straight week due to worries about a stalling economic recovery.

ETF INFLOWS CONTINUE

The world's largest gold exchange-traded fund, the SPDR Gold Trust saw fresh inflows on Thursday, when its holdings rose nearly 4 metric tons to 1,299.468 metric tons -- their highest since July 27. <GOL/SPDR>

On physical markets, buying continued in India, the biggest consumer of gold, ahead of a raft of festivals.

Physical gold demand tends to rise in August as jewelers stockpile inventory ahead of the start of India's festival season, which starts with Raksha Bandhan on August 24 and extends until Dhanteras in November, the biggest gold-buying day.

Silver fell to $17.98 an ounce from $18.24, while platinum was down at $1,507 an ounce from $1,520.50 and palladium dropped to $475 from $481.

The platinum group metals, chiefly used in autocatalyst manufacturing, suffered from concerns over growth.

The platinum-gold ratio -- or the number of ounces of gold needed to buy an ounce of platinum -- fell to its lowest since the end of June at 1.23 on Friday.

(Graphic: link.reuters.com/fut36n)

Prices at 4:15 p.m. EDT

LAST/ NET PCT YTD

CLOSE CHG CHG CHG US gold 1228.80 -6.60 -0.5% 12.1% US silver 17.991 -0.336 0.0% 6.8% US platinum 1513.90 -13.60 -0.9% 2.9% US palladium 476.20 -9.45 -1.9% 16.5%

Gold 1227.25 -2.85 -0.2% 11.9% Silver 17.95 -0.29 -1.6% 6.6% Platinum 1507.00 -13.50 -0.9% 2.8% Palladium 474.50 -6.50 -1.4% 17.0%

Gold Fix 1223.50 -7.00 -0.6% 10.8% Silver Fix 18.14 -31.00 -1.7% 6.8% Platinum Fix 1512.00 5.00 0.3% 3.1% Palladium Fix 478.00 5.00 1.0% 18.9%

(Additional reporting by Jan Harvey in London; Editing by Sofina Mirza-Reid)