Gold ends near three-month low as dollar soars

By Frank Tang and Jan Harvey

NEW YORK/LONDON (Reuters) - Gold slid as much as 2 percent on Friday to a three-month low as the dollar headed for its biggest weekly rise in 3-1/2 years, and it looked set to fall further as investors liquidated commodity holdings.

Gold was at $855.40/857.00 by New York's last quote, down from $871.05/872.45 late in New York. Earlier the metal hit a session low of $850.50, its weakest level since May 2.

The precious metal is down nearly $60 an ounce, or 6 percent, from its level in New York late last Friday.

"The main driver at this point is the strength of the dollar, without a doubt," said Tom Hartmann, a trader at Altavest Worldwide Trading.

A stronger dollar typically pressures gold, which is often bought as a hedge against weakness in the U.S. currency.

The dollar surged against the euro on Friday and was on track for its biggest one-day gain in about five years as evidence mounted the U.S. economic slowdown is spreading to the euro zone and around the world, damping the prospects of interest rate increases.

Traders also said that a euro zone rate hike was unlikely in the near future.

"In the near term, there is no immediate sign of a bounce," said James Steel, metals analyst at HSBC in New York.

Steel said that better physical off-take from jewelry buying should eventually cushion the gold market, but gold's outlook depended on the future directions of the dollar and oil.

Gold is also being pressured by a sell-off in commodities nearly across the board, with copper, coffee, sugar and oil all declining. The broad-based commodity index Reuters-Jefferies CRB slid nearly 3 percent.

George Gero, vice president of RBC Capital Markets Global Futures, said that rapid shrinkage of gold's open interest signaled heavy long liquidation with no new short positions, and gold could move to a new trading range between $850 and $900 in the near term.

U.S. crude oil slipped more than $5 a barrel as supply fears eased and as the firmer dollar prompted funds to exit commodities.

Gold and crude oil largely ignored geopolitical tensions following military conflicts between Russia and Georgia, because no threat is seen to the commodities' supply.

U.S. gold futures for December delivery settled down $13.10, or 1.5 percent, at $864.80 an ounce on the COMEX division of New York Mercantile Exchange.

SEVEN-MONTH LOW  Continued...