Dollar strength presses gold down toward $920

By Frank Tang and Veronica Brown

NEW YORK/LONDON (Reuters) - Gold hit its lowest level since mid May on Monday, breaking below $920 per ounce as the dollar lengthened broad gains with investors looking to a Federal Reserve meeting for clues about U.S. economic health.

The dollar gained as investors sought a safe haven .DXY amid concern about the euro zone economy and jitters ahead of Fed's rate setting meeting. The Fed jitters were seen supporting gold at lower levels.

The dollar's influence was reflected in a strong correlation with the spot gold price of negative 0.8, also seen as a sign of increasingly risk-averse behavior.

"The correlation with the dollar is up sharply in recent weeks," said Dan Smith, analyst at Standard Chartered. "We think the dollar is going to weaken and provide support for gold."

In early June, a weakening dollar and increasing demand for gold-backed funds helped bullion hit a three-month high of $989.80 an ounce. But the dollar has strengthened, dampening hedge buying in the gold market.

Spot gold fell 1.3 percent to $922 at 3:25 p.m. EDT. Earlier, it hit a one-month low at $917.90, sharply down from $933.80 quoted late on Friday in New York.

U.S. August futures settled down $15.20, or 1.6 percent, at $921 an ounce on the COMEX division of the New York Mercantile Exchange.

A 3.8 percent drop of U.S. crude oil futures to below $67 per barrel also dented bullion's appeal as an inflation hedge.

The Fed is not expected to adjust monetary policy at its two-day meeting starting on Tuesday, but investors will watch its statement for clues on the economic outlook and progress of its debt buyback program.

Investors also got bearish signals when the World Bank cut its 2009 growth forecasts for most economies and described the global outlook as "unusually uncertain."

INVESTMENT TAILS OFF

Silver followed gold lower, falling to $13.73 from $14.19 late on Friday in New York. Platinum was at 1159.50 per ounce, while palladium stood at 231.50.

Stronger economic indicators and lower-than-expected inflation data have prompted investment funds to unwind some long gold futures positions.

A weekly report by the U.S. Commodity Futures Trading Commission showed noncommercial net long U.S. gold futures positions fell 7.5 percent to 175,543 lots in the week to June 16 from 189,674 lots the week before.

The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, said its holdings stood at 1,132.15 tonnes as of June 19, unchanged since June 5.