Gold monthly fall biggest in 25 years

By Frank Tang and Humeyra Pamuk

NEW YORK/LONDON (Reuters) - Gold prices dropped 2 percent on Friday, concluding their worst month in a quarter century as a strong dollar and recession fears drove investors into less volatile assets.

Gold bullion lost 17 percent in October, its biggest decline since February, 1983, when it finished the month 18.2 percent lower.

Bullion is down 12 percent this year, well below the record high of $1,030.80 an ounce struck in March.

"Gold's moves today are mainly currency driven," said Simon Weeks, director of precious metals at the Bank of Nova Scotia.

"At the month-end, flows are in favor of the dollar."

Gold was at $720.35 an ounce at 2:04 p.m. EDT, 2.1 percent lower than Thursday's close of $735.50.

The U.S. dollar and yen posted sharp gains after bleak U.S. economic reports heightened global recession fears.

Gold tends to move opposite to the dollar, whose strength makes bullion more expensive for holders of other currencies.

A sharp drop of the COMEX futures open interest this week signaled more unwinding of long positions as extreme price volatility has dented buying sentiment.

"Another big-position account probably stepped to the sidelines," said FC Stone broker George Nickas, referring to the tumbling open interest, a measure of market liquidity.

Nickas said, however, that gold in the future should be supported by strong physical buying.

"The issue is that the futures are depressed, but the physical market still continues to remain tight, and buyers have to pay a premium to take possession," Nickas said.

U.S. gold futures for December delivery settled down $20.30, or 2.8 percent, at $718.20 an ounce on the COMEX division of the New York Mercantile Exchange.

Bullion hit a 13-month low of $680.80 last week after investors sold bullion to pay for margin calls. Signs of recovery in stock markets and firmer oil spurred a rebound in gold this week but technical selling emerged after gold did not sustain Thursday's high.

DOLLAR THE DRIVER