By Nicholas Larkin

Jan. 12 (Bloomberg) -- Gold fell for a second session in London as the dollar strengthened against the euro and oil prices slipped, reducing the metal’s appeal as an alternative investment to the U.S. currency and hedge against inflation.

The euro fell against the dollar on speculation the European Central Bank will cut interest rates this week to the lowest since 2005. Oil extended last week’s 12 percent drop on concern output cuts by OPEC will fail to counter lower demand. Bullion slipped 2.4 percent last week, the most in more than a month.

“The dollar is still the dictator of gold,” Bernard Sin, currency and metals trading chief at Swiss refiner MKS Finance SA, said by phone from Geneva. Physical demand is “still quite quiet” as people return from holidays, he said.

Gold for immediate delivery dropped as much as $10.40, or 1.2 percent, to $843.80 an ounce and traded at $846.99 an ounce by 12:37 p.m. in London. February futures slipped $8.20, or 1 percent, to $846.80 in electronic trading on the Comex division of the New York Mercantile Exchange.

The metal rose to $848.50 in the morning “fixing” in London, used by some mining companies to sell production, from $847.25 at the afternoon fixing on Jan. 9. Gold climbed 5.8 percent in London last year, the smallest gain since 2004.

Some investors may prefer gold to currencies as central banks across the world cut interest rates to stimulate growth. The Federal Reserve has slashed U.S. rates to as low as zero. The Bank of England cut its benchmark rate to an all-time low of 1.5 percent. The ECB’s rate is currently at 2.5 percent.

The dollar, which today gained as much as 1.1 percent against the euro, is up 4 percent this year. Bullion, down 4 percent in the period, typically moves in the opposite direction to the U.S. currency. Crude oil lost as much as 6.2 percent today. Some investors buy gold as a hedge against inflation.

Inflation Figures

“Much of the lower oil price effect still needs to reflect in inflation figures,” Walter de Wet, an analyst at Standard Bank Ltd. in Johannesburg, wrote in a report. “We expect crude oil to remain weak in the first quarter. Precious metals, especially gold, should find little support from this front.”

Still, the metal may rebound this week on speculation the dollar will slide, according to 17 out of the 28 traders, investors and analysts surveyed by Bloomberg. Six advised selling it and five were neutral.

Gold holdings in Zuercher Kantonalbank’s exchange-traded fund rose to a record 3.217 million ounces last week, from 3.176 million, the bank said today. Silver, platinum and palladium investment also increased.

Amongst other metals for immediate delivery in London, silver fell 1.2 percent to $11.135 an ounce. Platinum lost $12, or 1.2 percent, to $981.50 an ounce and palladium was 0.5 percent lower at $191.75 an ounce.

Silver held in Barclays Plc’s iShares Silver Trust, the biggest exchange-traded fund backed by the metal, rose by 218 metric tons to 7,063.5 tons on Jan. 9.

To contact the reporter on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net