* Gold sags; Egypt factor temporary
* Correlation with dollar at most positive since Sept
* Coming Up: U.S. Chicago PMI Jan; 1445 GMT
(Updates prices, adds comment)
By Amanda Cooper
LONDON, Jan 31 (Reuters) - Gold fell on Monday after posting
its largest daily gain in eight weeks on Friday and while the
market did encounter some safe-haven buying on the back of the
protests in Egypt, this was expected to be temporary.
Gold is set for its worst monthly performance since December
2009, driven down by the improving tone of some key U.S.
economic data, growing investor confidence and a near-record
decline in holdings of metal in exchange-traded funds.
Even a 2.6 percent fall in the dollar index <.DXY> has not
lifted gold this month, as the traditional negative correlation
between the two has reached its most positive since
mid-September.
Spot gold <XAU=> was last quoted at $1,329.40 an ounce by
1234 GMT, down 0.7 percent, having hit four-month lows last week
at $1,308.00. U.S. April gold futures <GCJ1> were last down 0.8
percent at $1,330.30.
Scenes in Egypt, where protesters intensified their campaign
to force President Hosni Mubarak to quit, have encouraged some
safe-haven buying of gold, although this support is unlikely to
last long, analysts said.
"What we've seen is (Egypt) has limited the downside more
than anything," said VTB Capital analyst Andrey Kryuchenkov.
"Technically, it's still weak, also I think the investment
community realises Egypt is probably a temporary thing,
something will come out of it, even if no one knows exactly what
that will be, more compromise from the government for example."
U.S. President Barack Obama on Sunday urged an "orderly
transition" to democracy in Egypt, stopping short of calling on
President Hosni Mubarak to step down but signaling that his days
may be numbered. []
The dollar index <.DXY> fell on Monday, while the euro rose
after above-expectations euro zone inflation data reinforced the
view that interest rates in the region will rise sooner than
previously thought. []
NO DOLLAR SUPPORT
But gold drew little comfort from the decline in the dollar,
which usually benefits the bullion market, as its traditional
inverse relation to the U.S. currency is still at its most
positive in four and a half months.
When the euro zone debt crisis worsened in May last year,
gold traded almost in lockstep with the dollar as investors fled
the euro. This time around, they appear to be punishing low- or
non-yielding assets in favour of equities and riskier
currencies.
"We fully accept that the acute reasons for holding gold in
the near term have abated, and we currently prefer industrial
metals," said UBS precious metals strategist Edel Tully.
"But we are not of the view that the necessity for holding
gold has passed. There remain compelling reasons why gold will
again return to investors' radar this year. Egypt is one such
reason. If investors come to believe that Europe's sovereign
debt problems will again escalate as we expect, and fear rising
emerging-market inflation, then longer-term exposures to gold
still make sense," she said in a note.
The world's largest gold-backed exchange-traded fund, SPDR
Gold Trust <GLD>, said its holdings slipped to an eight-month
low of 1,224.118 tonnes, reflecting the decline in investor
desire for bullion. []
Holdings of metal in the trust are set for their
second-largest monthly decline since the fund's inception in
late 2004, while open interest in COMEX gold futures staged its
largest weekly fall since at least 1996, according to last
week's Commitment of Traders data.
"We need to see the holdings in ETF start to increase before
gold prices can head up and make a new high. Bullion holdings at
ETFs are a reflection of longer-term demand for gold," said Ong
Yi Ling, investment analyst at Phillip Futures in Singapore.
"Recently, the holdings of gold ETFs have decreased due to
optimism in the U.S. economic recovery. If concerns over jobs
and unemployment come back to haunt us, then we could see the
ETF holding start to increase again."
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For a graphic on ETF holdings, click:
http://graphics.thomsonreuters.com/11/01/CMD_SPDR0111.gif
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On the physical market, premiums for gold bars were at their
strongest since at least 2004 on tight supply, short covering
before the festive season in India and China as well as physical
buying driven by the deadly protests in Egypt.[]
Silver was down 0.4 percent at $27.81, having risen earlier
to a 1-week high at $28.31.
Platinum <XPT=> was last down nearly 0.7 percent on the day
at $1,782.00 an ounce, while palladium <XPD=> was down 1.4
percent at $801.99.
(Additional reporting by Lewa Pardomuan in Singapore; Editing
by Keiron Henderson)
