* Gold sells off on liquidation by commodities funds
* Lessened inflation fears, signs of slowdown weaken gold
* Bullion down about 7 percent for the week
(Recasts, updates with quotes, closing prices, market
activity, adds NEW YORK dateline/byline)
By Frank Tang and Jan Harvey
NEW YORK/LONDON, Oct 17 (Reuters) - Gold prices dropped 2
percent on Friday, concluding a volatile week of selling, as a
lack of confidence in the financial system and a dollar rally
triggered heavy liquidation by commodity funds.
Gold's status as a hedge against inflation was also
weakened as investors fretted that a recession could not be
avoided amid a deepening financial crisis.
Gold bullion <XAU=> fetched $785.80 an ounce at 2:23 p.m.
EDT (1823 GMT), down 2.3 percent from Thursday's close of
$804.50. Earlier it touched $771.30, the lowest level since
Sept. 15.
Bruce Dunn, vice president of trading at New Jersey-based
Auramet Trading, said gold's drop was due to the dollar's
strength and a lack of confidence in the banking system.
"It's forced liquidation by the hedge funds that cannot
leverage their balance sheets anymore, and they are forced to
liquidate positions that they would rather hold," Dunn said.
The gold contract for December delivery <GCZ8> settled down
$16.80, or 2.1 percent, at $787.70 an ounce on the COMEX
division of the New York Mercantile Exchange.
Strength in the dollar against the euro was being supported
by interest in the currency as a haven from risk, analysts
said. This was weighing on gold, as it cuts the metal's appeal
as an alternative investment to the U.S. currency.
"This is a combination of the dollar being stronger, and
disillusionment that gold hasn't performed as well as might
have been expected (given that) a lot of measures of market
turmoil are still showing things to be as bad as ever," said
Matthew Turner, at commodity analysts VM Group.
Support from gold's other main external driver, crude oil,
was also waning. Oil prices jumped nearly $5 a barrel in early
trade, but later pared their gains. November crude oil futures
settled at $71.85 a barrel, up $2. []
Rising crude prices boost interest in gold as a hedge
against oil-led inflation.
A bounce in equity markets, after sharp losses in the
previous session, was also likely to cut some call for gold as
a haven from risk.
U.S. stocks, badly beaten down in recent weeks, were near
unchanged late in the day and European shares ended higher as
investors picked up battered bank and firmer oil prices
benefited energy shares. []
The world's largest gold-backed exchange traded fund, New
York's SPDR Gold Trust, said its bullion holdings slipped more
than 1 percent on Thursday to 756.86.
Hundreds of executives, fund managers, traders, analysts
and key personnel from the metals industry were in London this
week for the annual London Metal Exchange dinner and associated
events.
For full coverage of the LME Week click on [].
CAR SALES HIT PGMs
Among other precious metals, silver <XAG=> tracked gold
lower to $9.36 an ounce, down 2.9 percent from Thursday's
finish of $9.63. The precious metal slipped sharply on
Thursday, falling to a 2-1/2-year low of $9.21.
The platinum group metals also tumbled on Thursday, with
platinum and palladium both shedding more than 10 percent of
their value to their day lows on fears over falling car sales.
The metals extended those losses on Friday. The platinum
group metals are primarily used in catalytic converters, and
are sensitive to problems in the automotive sector.
The car market has been hit hard by the economic downturn,
with reports suggesting record low auto sales have sparked
merger talks among the major carmakers. []
"All commodities are under pressure and outlook for the car
industry is really depressing," said one European trader. "I
think we could see $800 in platinum and $150 in palladium
pretty soon. It seems some funds are still liquidating and
industry not really buying."
Spot platinum <XPT=> was quoted at $862.00 an ounce, down
from $884.50 late in New York on Thursday. Palladium <XPD=> was
at $170.50 an ounce, down slightly from Thursday's close of
$171.
(Editing by Walter Bagley)
