Sept. 5 (Bloomberg) -- Gold headed for its first weekly drop in three as the dollar strengthened against the euro, curbing demand for the metal as an alternative investment.

The relationship between gold and the euro-dollar exchange rate is strengthening, with a correlation of 0.7 so far this year, compared with 0.46 in the same period last year. A figure of 1 would mean the two moved in lockstep. The dollar rose for a seventh day against the euro.

``The bullish dollar has led gold to extend lower overnight,'' James Moore, an analyst at TheBullionDesk.com, wrote today in a report. ``We could see gold remain under pressure in the short term'' because of euro weakness, he wrote.

Gold for immediate delivery was little changed, gaining 16 cents to $796.61 an ounce as of 12:41 p.m. in London. A close at that price would mean a weekly drop of 4.2 percent.

Gold held by ETF Securities Ltd., a provider of exchange- traded funds, rose to a record 1.9 million ounces on Aug. 28, according to data posted on the company's Web site. Most of the gold backs ETFS Physical Gold.

Investors have withdrawn money from the physical gold fund for the first time in more than two months, Nicholas Brooks, head of research at ETF Securities in London, said today.

``This week it's likely we'll see some net outflows from ETFS Physical Gold,'' Brooks said. This follows 10 consecutive weeks of gains, he said. He declined to give figures.

Gold fell to $796.25 an ounce in the morning ``fixing'' in London, used by some mining companies to sell production, from $805.75 at the previous afternoon fixing.

Gold Forecast

Standard Chartered Plc cut its gold forecast for the fourth quarter to $850, compared with a previous forecast of $925. It expects gold to exceed $1,000 in the second half of next year.

``We have maintained our view that prices will trend higher over the medium term,'' Standard Chartered analysts led by Helen Henton wrote today in a report.

Silver fell 6 cents, or 0.5 percent, to $12.775 an ounce.

Assets in Barclays Plc's iShares Silver Trust, the largest exchange-traded fund backed by the metal, climbed to a record yesterday.

Silver held by the company rose 0.2 percent to 6,524.93 tons on Sept. 4, according to data posted on the company Web site.

Among other metals for immediate delivery, platinum fell $28.25, or 2 percent, to $1,371.75 an ounce and palladium dropped $3.75, or 1.3 percent, to $280.50 an ounce.

To contact the reporter on this story: Rachel Graham in London at rgraham13@bloomberg.net

Last Updated: September 5, 2008 08:04 EDT