Gold falls 2.5 percent on fund liquidation, dollar

By Frank Tang

NEW YORK (Reuters) - Gold prices fell sharply to a one-week low on Wednesday in choppy trading as funds frantically liquidated positions to cover margin calls amid steep losses, triggering a broad sell-off in commodities.

A sharply higher dollar versus the euro after hawkish comments from a European Central Bank official and signs of slowing demand for physical gold from top consumer India also weighed heavily on gold.

With a recovering dollar, sliding energy prices and little support from buyers, the weakness in gold prices was expected to continue into Thursday, dealers said.

"Today was the day traders, because of the significant move in the price of gold, had to answer margin calls. And it spread to other commodities. Nothing was immune from long liquidation today," said George Nickas, precious metals broker with FC Stone in New York.

"This most likely will continue into tomorrow before the dust settles," Nickas said.

Bullion XAU= dropped sharply in overnight trade as weaker oil prices encouraged investors to take profits after a failed run at record highs above $914 per ounce on Tuesday.

Losses were extended as the euro tumbled nearly 2 cents against the dollar EUR=, making dollar priced gold dearer for non-U.S. investors.

Gold was quoted at $885.60/886.30 in New York at 2:15 p.m. EST, down more than 2.5 percent from $899.50/900.20 quoted late in New York on Tuesday, after trading in a wide band of $877.80 to $899.25.

The most-active gold contract for February delivery at the COMEX division of the New York Mercantile Exchange GCG8 settled down $20.60, or 2.3 percent, at $882.00 an ounce.

"People want to take some money off the table. Today the only thing that supported the market was some minor short covering. Tomorrow morning, the market is going to be under the same stress," Nickas said.

Nickas also cited bearish signs about India's gold demand for Wednesday's weakness.

India's Bombay Bullion Association said on Tuesday the country's imports of gold in 2007 could have fallen by 20 percent due to a surge in prices. In 2006, India imported about 715 metric tons of gold.

The euro fell against the dollar after European Central Bank governing council member Yves Mersch said the central bank may lower its euro zone growth forecasts for 2008.

A further drop in crude oil prices dented the metal's appeal as a hedge against inflation.

U.S. crude futures CLc1 settled down $1.06 at $90.84 a barrel after on a sharp build in U.S. crude stocks and rising concerns that economic problems could erode fuel demand in the world's top energy consumer.