Gold dragged down by stronger dollar

By Alix Steel, TheStreet

Updated at 3:44 p.m. ET

Gold prices dipped modestly Monday, dragged down by a stronger U.S. dollar as investors piled into the currency as a haven.

Gold (-GC) for December delivery settled down $9.70 at $1,778.40 an ounce on light volume at the Comex division of the New York Mercantile Exchange. Gold traded as high as $1,797.60 and as low as $1,774.20 an ounce while the spot price was shedding $6.90, according to Kitco's gold index.

Silver (-SI) shed 66 cents to finish at $34.202 an ounce while the U.S. dollar index was up 0.7% at $77.46.

Gold prices struggled Monday as the European Central Bank's ex-vice president Mario Monti began the task of forming a new government in Italy. The news is good for gold, on the one hand, as Italy now has a better chance of implementing austerity measures and securing more bailout cash, which should prop up the euro and gold and weighs on the dollar. On the flip side, there are still many hurdles the government, as well as Greece's new government, have to overcome, which is triggering a flight to safety in the U.S. dollar.

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"Although the political uncertainty in Europe has eased a little with the latest developments in Italy and Greece, the sovereign debt crisis seems far from resolved on a lasting basis," says Commerzbank. Italy borrowed 3 billion euros for 5 years Monday but had to pay up, with yields rising to 6.29%, up 18% compared to a month ago. "Gold should therefore remain well supported."

Gold is typically a haven asset, but some traders, especially those on the futures market, could be selling positions to raise cash as prices near $1,800 an ounce.

Anecdotal data continues to point to strong investor interest. BullionVault.com, an online exchange, reported its financials for its full year 2011. The stock of gold bullion bars belonging to BullionVault participants grew 34% to more than 26 tons -- more than the gold combined reserves of Hong Kong, Luxembourg, Canada, Ireland and Qatar. Volume on its exchange grew 142%, which shows investors are actively trading gold.

BullionVault allows investors to access spot gold and essentially trade the metal with the London Bullion Market Association. Adrian Ash, head of research at BullionVault, says a select group of clients take physical delivery of gold but that the majority of their 33,000 users take advantage of volatility.

Throughout 2011, "many took a profit and then came back in at a lower price," which was the key factor in an increase in volume to $2.52 billion, although the number still pales in comparison to the London physical wholesale market, which averages $240 billion a day.

"Gold and silver get more attractive as the crisis worsens," says Ash who notes strong growth coming from France, Italy and Holland. "Our users buy the dips, (and there is) is new demand if prices sell off."

When panic has struck recently -- as when Greece was teetering on the brink of leaving the eurozone -- gold has sold off along with the euro, as investors needed cash to cover losses elsewhere. But Ash says their clients hold gold through big panics. (They have) a longer term game plan in mind."

Gold mining stocks were falling along with the metal Monday. Barrick Gold (ABX) was down 2% to $52.09 while Newmont Mining (NEM) was down 1.6% at $69.39. Goldcorp (GG) was sliding 2.1% to $52.84 and Randgold Resources (GOLD) was trading 1.8% lower at $117.19.