* Gold down 2 pct; posts largest monthly fall since 1983
* Bullion pressured as dollar rallies against the euro
* Physical buying should help prices
(Recasts, updates prices, market activity to close, adds
second byline, dateline, previously LONDON)
By Frank Tang and Humeyra Pamuk
NEW YORK/LONDON, Oct 31 (Reuters) - Gold prices dropped 2
percent on Friday, concluding their worst month in a quarter
century as a strong dollar and recession fears drove investors
into less volatile assets.
Gold bullion lost 17 percent in October, its biggest
decline since February, 1983, when it finished the month 18.2
percent lower.
Bullion is down 12 percent this year, well below the record
high of $1,030.80 an ounce struck in March.
"Gold's moves today are mainly currency driven," said Simon
Weeks, director of precious metals at the Bank of Nova Scotia.
"At the month-end, flows are in favor of the dollar."
Gold <XAU=> was at $720.35 an ounce at 2:04 p.m. EDT (1804
GMT), 2.1 percent lower than Thursday's close of $735.50.
The U.S. dollar and yen posted sharp gains after bleak U.S.
economic reports heightened global recession fears. []
Gold tends to move opposite to the dollar, whose strength
makes bullion more expensive for holders of other currencies.
A sharp drop of the COMEX futures open interest this week
signaled more unwinding of long positions as extreme price
volatility has dented buying sentiment. []
"Another big-position account probably stepped to the
sidelines," said FC Stone broker George Nickas, referring to
the tumbling open interest, a measure of market liquidity.
Nickas said, however, that gold in the future should be
supported by strong physical buying.
"The issue is that the futures are depressed, but the
physical market still continues to remain tight, and buyers
have to pay a premium to take possession," Nickas said.
U.S. gold futures for December delivery <GCZ8> settled down
$20.30, or 2.8 percent, at $718.20 an ounce on the COMEX
division of the New York Mercantile Exchange.
Bullion hit a 13-month low of $680.80 last week after
investors sold bullion to pay for margin calls. Signs of
recovery in stock markets and firmer oil spurred a rebound in
gold this week but technical selling emerged after gold did not
sustain Thursday's high.
DOLLAR THE DRIVER
"The key driver for gold at the moment is the U.S. dollar
and it looks like it is going to strengthen again and that is
definitely negative for gold," a London-based trader said.
U.S. data on Friday showed consumers in September cut
spending for the first time in two years, evidently bracing for
hard times.
"In times of recession, the most likely scenario for gold
is it goes down a lot, especially if it is trading at
historically high levels," said Jesper Dannesboe, senior
commodity strategist at Societe Generale.
"Because the fears of inflation will be replaced by fears
of disinflation and that is a killer for gold ... I think gold
is going below $600 in this cycle."
January platinum <PLF9> ended down $1 at $831.60 after
falling more than 5 percent during the session. Slowing
economies around the globe and the credit crisis have forced
auto companies to slash car production, hitting demand for
platinum which is used in catalytic converters.
Spot platinum <XPT=> traded at $813.50 ounce, after
touching an intraday low of $770, down from $817.00 in New
York. It has tumbled more than 60 percent since hitting a
lifetime high of $2,290 in March.
Palladium <XPD=> was at $193.50 from its previous close of
$197.00, while spot silver <XAG=> was bucking the falling trend
at at $9.83 an ounce, up 1.8 percent from Thursday close of
$9.66.
(Additional reporting by Anna Stablum in London; Editing by
David Gregorio)
