Gold prices retreated to hover near $1,080 on Monday after posting a third straight

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week of declines as investors remained wary of gains in the dollar which weaken bullion's appeal as a currency hedge.

A US proposal to limit bank risks continued to weigh on investor sentiment. The stronger dollar hit commodities across the board, with the Reuters-Jefferies CRB index, a commodities bellwether that tracks prices across 19 futures markets, ending January down about 6 per cent. That was its worst loss since November 2008, when it dropped almost 10 per cent.

A stronger dollar makes commodities denominated in the currency more expensive for holders of other currencies. Gold looked vulnerable, but a healthy appetite from physical buyers was seen likely to keep support solid around $1,074 an ounce.

"I think physical buying can offset fund selling, with $1,074 offering a very strong support," said Dick Poon, a manager of precious metals at Heraeus in Hong Kong. "Physical buying in Asia is strong, with seasonal demand before the Chinese Lunar New Year," he said, adding that such demand was expected to keep gold firm in the first quarter.

As expectations for higher interest rates were likely to grow later in 2010, the dollar's strength could become more prominent and weigh on gold in the second half of the year, Poon said.

Spot gold XAU was little changed at $1,078.60 per ounce as of 0242 GMT compared with New York's notional close of $1,079.20. Spot gold marked a low of $1,073.75 last Thursday, its weakest since Nov. 3, hit by a stronger dollar and uncertainty over how President Barack Obama's proposal to limit risk taking by US banks could impact gold trading.

US gold futures for April delivery inched down 0.4 per cent to $1,079.30, compared to $1,083.80 an ounce on the COMEX division of NYMEX.

With prices falling, noncommercial net long US gold futures positions fell 4.3 per cent to 211,924 lots in the week to Jan. 26 from 221,469 lots, a weekly report by the US Commodity Futures Trading Commission showed.

It was the largest drop since a 7 per cent decline in the week to Dec. 22, and down nearly 20 per cent from the peak of 262,331 lots in the week of Nov. 24.

The longs are bailing out, and while physical demand supports, the market may remain pressured until the long liquidation runs its course, Yuichi Ikemizu, Tokyo branch manager for Standard Bank, said in a report.

Net longs in gold futures fell 100 tonnes to 841 tonnes as of Jan. 26 from previous week's 951 tonnes, the lowest since September last year, Ikemizu's report said.

Investment into gold has stalled, with holdings at the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, staying flat at 1,111.922 tonnes as of Jan. 29.

The dollar was steady on Monday, keeping most gains made the previous business day when it rose against other major currencies after stronger-than-expected economic data reinforced the view that the United States was recovering from recession faster than other developed countries.