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Gold ends sharply lower on fund liquidation

NEW YORK/LONDON (Reuters) - Gold tumbled nearly 3 percent in volatile trade on Monday, ending just above $880 an ounce as a sudden rise in the dollar against the euro prompted panic selling by funds in exchange for cash.

A woman displays gold bars at a shop in Hanoi June 23, 2008. REUTERS/Nguyen Huy Kham

However, a resurgence in physical demand after gold dipped below $880 an ounce put a floor in prices.

Gold was at $882.85/884.05 by New York’s last quote at 2:15 p.m. an ounce (2:15 p.m. EDT), against $901.35/902.75 late in New York on Friday. It touched a session low of $877.00.

Silver fell almost 5 percent to a session low of $16.56 an ounce, then recovered and was last at $16.75/16.83 against its U.S. close of $17.36/17.43 on Friday.

“The most obvious driver of the day is that the euro has collapsed,” said JP Morgan analyst Michael Jansen.

The dollar rallied on expectations that the U.S. Federal Reserve will leave rates unchanged at 2 percent at its meeting this week. The euro fell on weak economic data from the euro zone.

A stronger dollar typically weighs on gold, which is bought as a hedge against weakness in the U.S. currency. A stronger greenback also makes gold more expensive for holders of other currencies.

Jonathan Jossen, an independent COMEX floor trader, said panic selling by funds and position squaring ahead of the Fed meeting pummeled gold futures.

“Gold wasn’t able to hold the $900 mark, so there was some technical selling,” said Carlos Sanchez, precious metals analyst at CPM Group in New York.

Sanchez also cited redemptions by institutional investors and hedge funds that needed cash.

The gold contract for August delivery on COMEX division of New York Mercantile Exchange settled down $16.50, or 1.8 percent, at $887.20 an ounce.

PHYSICAL BUYING, OIL GAINS HELP

However, traders said interest in gold from physical buyers, who have been discouraged by high and volatile prices in recent months, has supported the market.

“We ran into some good physical interest in the high $870s,” said Simon Weeks, director of precious metals at the Bank of Nova Scotia. “That has stopped the rot.”

Bullion also cut losses on stronger oil as Nigerian supply disruptions and escalating tensions between Israel and Iran outweighed Saudi Arabia’s pledge to raise output and keep markets well-supplied.

U.S. crude futures ended up $1.38 at $136.74 a barrel.

The U.S. Federal Open Market Committee (FOMC), which starts its two-day meeting on Tuesday, is widely expected to leave rates at 2 percent while issuing a statement about the need to watch for inflation. Any suggestion that a rate hike may be coming this year could help the dollar and pressure gold.

Among other precious metals, spot platinum slipped to $2,033.50/2,053.50 an ounce from $2,048.50/2,068.50 late in New York on Friday.

Palladium was last at $464.00/472.00 an ounce from its Friday’s U.S. finish $469.50/477.50 an ounce.

Editing by David Gregorio

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