Gold retreats on firm dollar, set for weak September

(Reuters) – Gold retreated on Friday as gains in the dollar pressured commodities priced in the U.S. unit, and was set to end September with its biggest monthly drop in nearly three years after recent weeks’ heightened volatility spooked buyers.

The metal remained on track for its biggest quarterly gain this year, however, as concerns that the euro zone debt crisis was far from resolved underpinned interest in gold as an alternative to assets seen as higher risk such as stocks.

Spot gold was at $1,614.30 an ounce at 1348 GMT, little changed from its level late in New York on Thursday, having earlier traded as high as $1,639.99.

Extreme volatility this month saw the metal in a near $400 range after hitting a record $1,920.30 an ounce on September 6.

Though the correction from that high has lifted physical demand, buyers remain wary of gold after this month’s violent fluctuations. Afshin Nabavi, head of trading at MKS Finance, said the market was struggling within the $1,600-1,650 range.

“With the current demand we are seeing in gold in particular, the market is not performing,” he said. “I think we should see a good, healthy correction first, before heading toward the all-time highs.”

Renewed fears of a slowdown in the global economy combined with the long-dragging euro zone debt crisis weighed on European stocks on Friday, as one of the most volatile and worst quarters since late 2008 came to an end. .EU

Stock market weakness and worries over the euro zone crisis hurt the euro, which fell 1 percent versus the dollar. The dollar has benefited from this month’s elevated risk aversion, up nearly 6 percent against a currency basket. <FRX/>

The risk aversion that drove gold prices higher earlier in the quarter turned negative for the metal as a slide in other assets prompted selling to cover losses elsewhere. A rise in margin requirements for U.S. gold futures also weighed.

Longer term, however, it is still expected to benefit from concerns over the U.S. and euro zone economies and the instability of the wider financial markets.

“Any time you have a sharp spike in risk aversion, gold prices tend to come off, and then once the markets start to normalize, prices tend to benefit,” said Bank of America-Merrill Lynch analyst Michael Widmer.

“The fact that gold gets caught up makes perfect sense — if you’ve got margin calls… and other positions under water, that will cause selling,” he added.

“Ultimately the fundamentals that we thought were positive for gold are still in place — issues in Europe and the United States, slowing GDP growth, central banks doing their magic.”

U.S. gold futures for December delivery were down 1.50 an ounce at $1,615.80.

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