* Near 400 point drop in Dow prompts gold liquidation
* Oil drops more than $3 barrel, commodities down 3 pct
* Traders expect strong cash gold to support
(Recasts, updates with quotes, closing prices, market
activity, adds NEW YORK to dateline)
By Frank Tang and Jan Harvey
NEW YORK/LONDON, Nov 12 (Reuters) - Gold closed down 2
percent on Wednesday as investors shunned risky assets and as
slumping commodities dampened inflation expectations.
But firm physical demand helped keep gold's price from
tumbling as much as crude oil or major stock indexes, or the
broad-based Reuters/Jefferies CRB <.CRB> commodity index which
fell nearly 3 percent.
"We've been undergoing a shift in inflation expectation
over the last few weeks with the worsening outlook for the U.S.
economy and with the decline in most commodity prices,
particularly oil," said Jeffrey Nichols, head of American
Precious Metals Advisors and NicholsOnGold.com.
"People are less concerned that inflation is going to take
off, and therefore that type of hedge buying of gold has
diminished," Nichols said.
Spot gold <XAU=> was at $715.60, down 2.1 percent from
Tuesday's close of $731.70 an ounce.
U.S. gold futures for December delivery <GCZ8> settled down
$14.50, or 2 percent, at $718.30 an ounce on the COMEX division
of the New York Mercantile Exchange.
A drop of nearly 400 points in the Dow Jones industrial
average <> also accelerated indiscriminate selling of all
liquid assets including gold to cover equity losses.
The dollar rose due to a flight to safety and dented
interest in gold, which is often bought as an alternative
investment to the U.S. currency.
"Gold is back to trading up and down according to what the
dollar is doing," said Stephen Briggs, commodity strategist at
RBS Global Banking & Markets.
Briggs said gold was being pressured in opposite directions
by strong interest in gold products such as jewelry, coins and
bars, and physically-backed ETFs on the one hand, and futures
market fund selling on the other.
"Physical investment has been pushing gold up, but the
paper market has been pushing it down," he said.
Physical demand for gold is underpinning prices at lower
levels, with dealers reporting strong buying in major bullion
market India as the wedding season gets under way.
Chinese investment demand is gathering pace this year, with
investment reaching 38.4 tonnes in the first nine months of
2008 against 24 tonnes for the whole of 2007, the China
National Gold Corp said at a conference. []
OIL FALLS
Crude oil, the other main external driver of gold, shed
more than $3 a barrel to end just above $56 as fears the
economic slowdown will knock demand offset news of supply
reductions. []
Traders were awaiting data on U.S. crude inventories due on
Thursday to give fresh direction to the oil market, which
should influence gold.
UBS cut its gold price forecast for 2009 by 15 percent to
$700 an ounce, and its price view for platinum by 18 percent to
$900 an ounce.
"Gold will remain under pressure in 2009 from a combination
of slowing demand for jewelry from important emerging markets
and disinvestment as inflation slows and the dollar continues
to strengthen," UBS said in a report.
Among other precious metals, platinum rose 3 percent to a
high of $840 an ounce.
Spot platinum <XPT=> fetched $810.50, down from Tuesday's
finish of $812.50. Spot palladium <XPD=> was at $210.50 an
ounce, lower than its previous close of $212.
Spot silver <XAG=> was at $9.42, down 3.3 percent from
Tuesday's close.
(Reporting by Frank Tang; editing by Jim Marshall)
