Feb. 2 (Bloomberg) -- Gold fell from a six-month high in London as the dollar strengthened, diminishing the metal’s appeal as a hedge against weakness in the currency.

The euro dropped to its lowest in almost two months against the dollar on speculation a report tomorrow will show European producer prices slid for a fifth month. The drop in gold may have been exaggerated by the return of traders from the week-long Lunar New Year holiday.

“According to our traders, today’s selling emanated from Chinese traders,” UBS AG analyst John Reade said in a note. “We suspect they saw euro-dollar lower, gold much higher and sold short-term gold positions they owned. The sharp move lower triggered stops on the electronic futures market.”

Gold for immediate delivery fell as much as 2.6 percent to $903.40 an ounce and was at $911.18 as of 12:14 p.m. in London. The metal closed at $927.85 on Jan. 30, the highest closing price since July 28. Gold for April delivery dropped $15.30, or 1.7 percent, to $913.10 an ounce in after-hours electronic trading on the Comex division of the New York Mercantile Exchange.

“We expect safe haven buying to support gold and hold our one-month forecast at $900,” Reade said.

Hedge-fund managers and other large speculators increased their net-long position in New York gold futures in the week ended Jan. 27, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 141,114 contracts on the Comex division of the New York Mercantile Exchange, the Washington- based commission said in its Commitments of Traders report.

Fund Holdings

Holdings in the SPDR Gold Trust, the largest exchange-traded fund backed by bullion, exceed the gold reserves of all but five central banks and the International Monetary Fund. Investment in the fund is at a record 843.6 metric tons.

Deutsche Boerse AG’s Eurex derivatives exchange started futures and options in gold and waived trading and clearing fees until June. The dollar-denominated contracts are based on prices from the London Bullion Market Association’s fixings.

The metal fell to $913.75 an ounce in the morning “fixing” in London, used by some mining companies to sell production, from $919.50 at the afternoon fixing Jan 30.

Silver for immediate delivery declined 24 cents, or 1.9 percent, to $12.43 an ounce in London. Platinum dropped $12.50, or 1.3 percent, to $975.50 an ounce and palladium rose $1, or 0.5 percent, to $194.50 an ounce.

To contact the reporter on this story: Chanyaporn Chanjaroen in London at cchanjaroen@bloomberg.net

Last Updated: February 2, 2009 07:18 EST