* Gold sags; Egypt factor temporary
* Correlation with dollar at most positive since Sept
* Coming Up: U.S. Chicago PMI Jan; 1445 GMT
(Updates prices, adds comment)
By Amanda Cooper
LONDON, Jan 31 (Reuters) - Gold fell on Monday after posting its largest daily gain in eight weeks on Friday and while the market did encounter some safe-haven buying on the back of the protests in Egypt, this was expected to be temporary.
Gold is set for its worst monthly performance since December 2009, driven down by the improving tone of some key U.S. economic data, growing investor confidence and a near-record decline in holdings of metal in exchange-traded funds.
Even a 2.6 percent fall in the dollar index <.DXY> has not lifted gold this month, as the traditional negative correlation between the two has reached its most positive since mid-September.
Spot gold <XAU=> was last quoted at $1,329.40 an ounce by 1234 GMT, down 0.7 percent, having hit four-month lows last week at $1,308.00. U.S. April gold futures <GCJ1> were last down 0.8 percent at $1,330.30.
Scenes in Egypt, where protesters intensified their campaign to force President Hosni Mubarak to quit, have encouraged some safe-haven buying of gold, although this support is unlikely to last long, analysts said.
"What we've seen is (Egypt) has limited the downside more than anything," said VTB Capital analyst Andrey Kryuchenkov.
"Technically, it's still weak, also I think the investment community realises Egypt is probably a temporary thing, something will come out of it, even if no one knows exactly what that will be, more compromise from the government for example."
U.S. President Barack Obama on Sunday urged an "orderly transition" to democracy in Egypt, stopping short of calling on President Hosni Mubarak to step down but signaling that his days may be numbered. [
]The dollar index <.DXY> fell on Monday, while the euro rose after above-expectations euro zone inflation data reinforced the view that interest rates in the region will rise sooner than previously thought. [
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NO DOLLAR SUPPORT
But gold drew little comfort from the decline in the dollar, which usually benefits the bullion market, as its traditional inverse relation to the U.S. currency is still at its most positive in four and a half months.
When the euro zone debt crisis worsened in May last year, gold traded almost in lockstep with the dollar as investors fled the euro. This time around, they appear to be punishing low- or non-yielding assets in favour of equities and riskier currencies.
"We fully accept that the acute reasons for holding gold in the near term have abated, and we currently prefer industrial metals," said UBS precious metals strategist Edel Tully.
"But we are not of the view that the necessity for holding gold has passed. There remain compelling reasons why gold will again return to investors' radar this year. Egypt is one such reason. If investors come to believe that Europe's sovereign debt problems will again escalate as we expect, and fear rising emerging-market inflation, then longer-term exposures to gold still make sense," she said in a note.
The world's largest gold-backed exchange-traded fund, SPDR Gold Trust <GLD>, said its holdings slipped to an eight-month low of 1,224.118 tonnes, reflecting the decline in investor desire for bullion. [
]Holdings of metal in the trust are set for their second-largest monthly decline since the fund's inception in late 2004, while open interest in COMEX gold futures staged its largest weekly fall since at least 1996, according to last week's Commitment of Traders data.
"We need to see the holdings in ETF start to increase before gold prices can head up and make a new high. Bullion holdings at ETFs are a reflection of longer-term demand for gold," said Ong Yi Ling, investment analyst at Phillip Futures in Singapore.
"Recently, the holdings of gold ETFs have decreased due to optimism in the U.S. economic recovery. If concerns over jobs and unemployment come back to haunt us, then we could see the ETF holding start to increase again." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
For a graphic on ETF holdings, click: http://graphics.thomsonreuters.com/11/01/CMD_SPDR0111.gif ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
On the physical market, premiums for gold bars were at their strongest since at least 2004 on tight supply, short covering before the festive season in India and China as well as physical buying driven by the deadly protests in Egypt.[
]Silver was down 0.4 percent at $27.81, having risen earlier to a 1-week high at $28.31.
Platinum <XPT=> was last down nearly 0.7 percent on the day at $1,782.00 an ounce, while palladium <XPD=> was down 1.4 percent at $801.99. (Additional reporting by Lewa Pardomuan in Singapore; Editing by Keiron Henderson)