NEW YORK Gold dropped nearly 3 percent on Friday as the dollar charged higher against the euro and crude oil tumbled to a 4-1/2-year low.
Though the yellow metal later trimmed its steep losses, the upside was capped by the implications of a stronger economy after U.S. carmakers received word of the White House's plan to provide them with a government loan.
Spot gold fell to a session low of $829.10 an ounce but trimmed some of its losses to $836.75 an ounce by late Friday business in New York from $855.30 an ounce on Thursday.
February gold futures finished $23.20 lower, a 2.70 percent decline, at $837.40 an ounce on the COMEX division of the New York Mercantile Exchange. It slid as low as $830.10, a level last seen on December 15, from a high at $854.90.
"I think it was hit mostly by the dollar when the ECB, yesterday, cut the deposit rates, it really shows they're acknowledging that they have credit problems," said MF GLOBAL, precious metals and energy analyst Tom Pawlicki.
"And then when you throw in the partial auto bailout the automakers got today, it really argues for a higher dollar going forward. That could be a negative for gold," he added.
Gold prices initially pulled up from early lows after an official announced the White House would make loans available to ailing auto manufacturers from the Troubled Asset Relief Program, traders said.
But once participants saw the bailout plan may eventually restore growth to the U.S. economy, some gold investors unwound their safe haven plays, traders added.
"I think the bailout itself is a negative for gold because as we get in a position to take more risk and looking at the (U.S.) economy as not being as bad as previously anticipated it could be a negative for gold," Pawlicki added.
The U.S. government offered up to $17.4 billion in loans to ailing U.S. automakers and said it expected General Motors (GM.N) and Chrysler to access the money immediately.
Then, President George W. Bush said the government will provide U.S. automakers financial aid or their collapse could send the economy into deep and long recession.
Earlier, the euro fell broadly as traders locked in profits from the currency's rally to a 2-1/2-month high against the dollar and its strongest level ever against sterling.
Bullion rallied to a two-month high of $881.20 this week, boosted by the gains in the euro, which had been on track to post a weekly rise of more than 5 percent against the dollar, its biggest since the single currency was launched in 1999.
Gold tends to move in the opposite direction to the dollar as a strong U.S. currency makes gold more expensive for local currency holders.
"We are going to be bouncing around the range but the tendency is toward the downside for gold," Tom Kendall, precious metals strategist at Mitsubishi.
Crude oil's sharp decline was also pressuring bullion.
Oil fell below $34 on Friday to its lowest level in 4-1/2 years as the global economic slowdown overshadowed OPEC's record supply cuts.
"There is strong support between $800 and $810 and it looks as if, barring any more external shocks, gold will finish the year in the area of $850, on a level with the start of 2008," Societe Generale said in a research note.
Despite gold's impressive 20 percent rally in December alone, some thought the outlook remained bearish.
"The economic outlook is as bad as it has been at any time in the past 100 years. Gold cannot be immune to this," Fortis Metals said in a research note. "It will be hit by a decline in jewelry demand, at least of the adornment variety."
Local jewelers in Dubai's traditional gold markets said this week that sales had collapsed as much as 80 percent in the last couple of weeks.
Spot platinum was at $846.50 an ounce versus $849.50 while spot palladium was firmed to $175.50 an ounce. Silver fell to $10.82 from $10.93.
(Additional reporting by Humeyra Pamuk in London; Editing by Christian Wiessner)