Gold eases on firm dollar, euro zone fear

Gold prices edged down on Monday, after the momentum that pushed prices up 3% last week fizzled as the dollar firmed with growing worries about the euro zone debt crisis.

Concerns about the debt crisis overshadowed upbeat data out of the United States which showed the unemployment rate fell to a near three-year low, evidence that economic growth is gaining steam.

After ignoring the dollar's strength for two days last week, gold buckled under the dollar, which rose to a near 16-month high against a basket of currencies at the expense of a battered euro.

"There is a somewhat weaker trend across the commodities, as the strength of the dollar is playing a role in limiting appetite," said Nick Trevethan, senior commodity strategist at ANZ in Singapore.

The positive US employment report also weighed on sentiment on gold, as it lessens the chance of further easing from the US Federal Reserve, added Trevethan.

"But Europe is still a basket case and investors are hoping to see more easing out of the European Central Bank (ECB) at some point."

Investors are pinning their hopes on further monetary easing from the Federal Reserve and ECB to propel gold to new highs this year.

Spot gold dropped 0.2% to $1,613.70 an ounce by 0713 GMT, on course for a second straight session of losses.

The most-active US gold futures contract edged down 0.1% to $1,614.80.

Technical analysis suggested that spot gold could drop to $1,589 an ounce during the day, said Reuters market analyst Wang Tao.

The annual rebalancing of commodity indices, including DJ-UBS and SPGSCI, which happens in the first two weeks of the year, is likely to weigh on gold -- one of the outperformers of 2011, analysts said.

"The rebalancing is mostly but not exclusively a matter of selling the previous year's outperformers and buying the underperformers to bring the portfolio composure back in line," said Saxo Bank in a research note.

The dollar rally also kept a lid on Asia's appetite for bullion.

"Gold is not cheap in local currencies in Asia and we only see some light buying," said a Singapore-based dealer, who added that gold bar premiums rose to $1.70 an ounce above spot prices, from $1.30 a week earlier.

The euro zone will kick off a busy week with a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy on measures to boost jobs in debt-laden states.

Market participants will also closely watch debt auctions this week by Italy and Spain, seen as a test if investors are willing to pour more money into the euro zone, now in its third year of the debt crisis.

Money managers reduced their net length in US gold futures and options for a third straight week in the week ended January 3, down to its lowest in nearly two years, said the US Commodity Futures Trading Commission.