Gold slips back below $800/oz on dollar, oil

By David Sheppard

LONDON (Reuters) - Gold slipped back below $800 an ounce on Thursday as the dollar resumed its climb against the euro and oil prices dropped more than $1 a barrel on fears of weak demand.

Gold rose early in the session on strong physical buying as jewellers took advantage of the metal's fall towards a nine-month low near $790 an ounce on Wednesday.

But gold gave up its gains when the dollar rose against the euro after U.S. service sector data came in stronger than forecast, then extended its gains after European Central Bank President Jean-Claude Trichet said the euro zone was in a period of weak economic activity.

Gold fell in New York trading to $795.85/797.45 at the close from $800.05/801.65 an ounce late on Wednesday. Earlier, it rose to a day high of $814.70 an ounce.

In New York, December gold settled $5 lower at $803.20 an ounce on the COMEX division of the New York Mercantile Exchange.

Weaker oil prices weighed on sentiment, with gold's appeal as an inflation hedge diminished as crude prices finished more than $1 a barrel lower.

"Physical demand is holding up well, if not quite at the very strong levels we've been seeing lately -- but it's still historically strong," said UBS analyst John Reade.

"The speculative market is a bit sold-out at the moment so the dollar's strength this afternoon is perhaps having less impact than it normally would."

UBS is one of the largest gold dealers and the investment bank said that over the last two weeks, it had seen its strongest physical sales in 20 years.

The dollar's rally has reduced gold's appeal to investors as a hedge against weakness in the U.S currency, with bullion prices down from $980 an ounce seen when the dollar hit its all-time low against the euro back in mid-July.

Many analysts see gold trading in a tight range in the near term as investors try to gauge the impact of higher gold sales at lower price levels versus the impact of the dollar's near 17 cent recovery against the euro over just six week.

EID AL-FITRI

International dealers saw purchases from jewellers in Indonesia ahead of the Eid al-Fitri Muslim holidays in October and safe-haven buying from Thailand, where Prime Minister Samak Sundaravej refused despite street campaigns against him.

Demand from India, the world's largest consumer, and also the Middle East have helped to stem gold's decline from above $980 an ounce back in mid-July.

However, there are concerns that strong demand during August from key market Turkey may falter due to volatile prices and the end of the wedding season.   Continued...