Gold drops 1 percent on dollar surge, silver up

NEW YORK (Reuters) - Gold fell on Friday, sharply reversing early gains, as a dollar surge against the euro and renewed uncertainty about euro zone debt prompted investors to sell ahead of the weekend.

Silver continued to recover from last week's 25 percent correction, and technical charts suggested the metal could stabilize after bouncing off a key support level.

"It's mostly position squaring over the weekend," said Axel Merk, who manages $700 million mutual fund assets at Merk Investments. "We've had this dramatic run-up week after week in both gold and euro."

"The good news is that it shakes out the trend chasers and momentum traders coming into these markets, and what you end up are stronger hands who are buying gold and euro in the long term," he said.

Spot gold fell 0.7 percent to $1,492.50 an ounce by 3:09 p.m. EDT, having earlier risen as high as $1,516.40. U.S. gold futures for June delivery settled down $13.20 at $1,493.60, after trading in a range from $1,482 to $1,516.40.

For the week, gold was flat after shedding nearly 5 percent last week during a commodity rout.

Money managers cut bullish bets in COMEX silver futures and options to the lowest level since January, as prices tumbled as much as 30 percent from a record high near $50 an ounce, and they also slashed net longs in gold during the period, U.S. regulator data showed.

Earlier in the session, gold rose after data showed gasoline and food prices hoisted U.S. inflation to a 2-1/2 year high in April, but there was little sign of a broader pick-up in consumer prices that would trouble the Federal Reserve.

Even as gold investors continued to pay close attention to market uneasiness about Washington's fraught political battle over public spending, Asia's reserve-rich nations see no viable option but to keep on purchasing U.S. government debt, policymakers told Reuters.

Gold was pressured as the U.S. dollar scaled six-week peaks against the euro as concerns about the global economy spurred a return to the greenback's safety.

Precious metals have been pressured by worries about dollar strength, ahead of a meeting of Eurogroup finance ministers, followed by an Ecofin meeting of EU finance ministers on Monday, which could provide further direction to the euro. The single currency is likely to remain under pressure until at least after investors digest any outcome.

SILVER FINDS CHART SUPPORT

Silver was up 1.2 percent at $34.62 an ounce. It still lost about 1.5 percent for the week after notching its worst weekly performance since 1980 last week.

Silver had lost as much as 30 percent from its record high of $49.51 an ounce set on April 28.

Earlier this week, the metal bounced off a low of $32 an ounce near trendline support dating back to August 2010, a sign of stability for the market.

Silver was still up 13 percent this year, and it was also the top performer in the commodity complex with a 90 percent gain in 2010.

The largest silver ETF, the iShares Silver Trust, reported its holdings slipped another 24.3 tonnes on Thursday. Although silver is outperforming other precious metals on Friday, it is expected to suffer further losses.

Platinum eased 0.1 percent at $1,760.24 an ounce, while palladium fell 0.9 percent to $704.49.

(Additional reporting by Jan Harvey in London; Editing by Marguerita Choy)