Gold drops over 1 pct on book squaring, dollar rise

By Frank Tang and Clara Denina

NEW YORK/LONDON (Reuters) - Gold and other precious metals fell on Thursday, pressured as commodity funds sold to square books at the end of October, and as investors kept selling after the Federal Reserve's latest policy outlook offered few surprises.

A sharp rise in the dollar index also pressured commodities after data showed business activity in the U.S. Midwest surged past expectations in October, countering recent evidence of soft economic growth.

Comex gold options floor trader Jonathan Jossen said many commodity funds close out core positions and make funds available for year-end taxes on Oct 31, the last day of the fiscal year for such funds.

"It's a very benign equity move today, and here gold is down sharply," Jossen said. The S&P 500 equities index was little changed on Thursday.

Spot gold was down 1.4 percent at $1,322.90 an ounce by 1:19 p.m. EDT (1719 GMT). During the session, gold hit a one-week low at $1,318.79.

For the month, gold was down just 0.2 percent, with the decline limited by economic uncertainty over a partial U.S. government shutdown and a crisis to raise the debt ceiling.

U.S. gold futures for December delivery were down $26.30 at $1,323 an ounce.

On Wednesday, gold fell after the Fed did not sound quite as alarmed about the economy after its last policy meeting as some had anticipated. The U.S. central bank kept its $85 billion-a-month stimulus plan intact.

Silver underperformed to fall 3.5 percent at $21.85 an ounce, putting it on track for its biggest one-day loss in more than a month.

CHINA PREMIUMS ERASED

Bullion was also undermined by slow physical buying in Asia, especially China.

Premiums of physical gold bars on the Shanghai Gold Exchange have largely faded due to fears of a cash crunch, dealers said.

Data showed that China in September bought more than 100 tonnes of gold from Hong Kong for a fifth straight as demand for bullion bars and jewellery was strong.

Spot platinum was down 1.8 percent at $1,444 an ounce, while spot palladium fell 1.2 percent to $733.97 an ounce.

Prices at 1:19 p.m. EDT (1719 GMT)

(Additional reporting by Jan Harvey in London; Editing by Jason Neely, James Jukwey and David Gregorio)