Feb. 3 (Bloomberg) -- Gold gained for a third day in London as the dollar extended a decline, boosting demand for the metal as an alternative investment.

The U.S. Dollar Index, a six-currency gauge of the greenback’s strength, fell for a third day before a report that may show U.S. service industries expanded at the fastest pace in more than a year in January. Gold, which climbed to a two-week high, typically moves inversely to the U.S. currency.

“The euro seems to be on the upside, and that’s beneficial for gold,” said Afshin Nabavi, a senior vice president at bullion refiner MKS Finance SA in Geneva. “Physical demand is exceptionally good,” and prices may climb toward $1,140 an ounce if they surpass $1,125, he said.

Gold for immediate delivery added as much as $10.65, or 1 percent, to $1,125.10 an ounce and traded at $1,119.34 at 11:19 a.m. local time. Bullion for April delivery was up 0.2 percent at $1,112 on the New York Mercantile Exchange’s Comex unit.

The metal increased to $1,118.50 an ounce in the morning “fixing” in London, used by some mining companies to sell production, from $1,111 at yesterday’s afternoon fixing.

“Price levels below $1,100 an ounce apparently attract buyers who consider this as a lucrative entry point,” Eugen Weinberg, a senior analyst with Commerzbank AG, wrote in a note to clients.

Gold climbed for a ninth year in 2009, reaching a record $1,226.56 an ounce on Dec. 3 as the dollar slumped on record-low interest rates and a surge in government stimulus spending. Spot prices fell in the prior three weeks as the dollar strengthened and the Dow Jones Stoxx 600 Index of European shares slid last month the most in 11 months.

Pimco Forecast

The equity-market decline may worsen amid persistent U.S. joblessness and economic growth that trails economists’ forecasts, said Mohamed A. El-Erian, whose firm runs the world’s biggest mutual fund. Investors have wrongly priced in an “orderly” withdrawal of stimulus measures, a rebound in bank lending and coordinated government policy to restore growth, El- Erian, Pacific Investment Management Co.’s chief executive officer, wrote in a Bloomberg News column.

Bullion will average $1,135 an ounce this year, up from a previous forecast of $1,050, UBS AG said in a report yesterday. Newmont Mining Corp., the world’s second-largest gold producer by sales, reaffirmed its forecast for the metal to rise to $1,350 by the end of 2010.

“I feel pretty confident that as things move forward, we will see continued support for the gold price,” CEO Richard T. O’Brien said today at the company’s $2.9 billion Boddington operation, Australia’s biggest gold mine. “No question it will be volatile, but we will see support.”

Holdings in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, were unchanged at 1,111.92 metric tons yesterday, according to the company’s Web site.

Silver for immediate delivery gained 0.5 percent to $16.7950 an ounce in London. Platinum added 0.1 percent to $1,581.50 an ounce and palladium climbed 0.7 percent to $445.13 an ounce.

Platinum and palladium are mainly used in automotive pollution-control devices and jewelry. Vehicle sales in the U.S. rose 6.3 percent in January, Autodata Corp. said yesterday.

To contact the reporters on this story: Jae Hur in Tokyo at jhur1@bloomberg.net; Nicholas Larkin in London at nlarkin1@bloomberg.net

Last Updated: February 3, 2010 06:46 EST