Gold gains 1 percent as dollar slips from highs

• Reuters
• , Thursday May 8 2008

(Updates with quotes, prices)

By Atul Prakash

LONDON, May 8 (Reuters) - Gold rose more than 1 percent on Thursday as the dollar changed course to fall from two-month highs against the euro after the European Central Bank left interest rates unchanged at 4 percent.

ECB President Jean-Claude Trichet said the central bank must ensure inflation remains temporary even as risks to euro zone growth prevail..

Gold rose as high as $879.85 an ounce and was quoted at $876.35/877.35 at 1415 GMT, against $870.85/872.05 late in New York on Wednesday and last week's four-month low of $845.

"The metal's short-term direction is still coming from the dollar. Given that oil prices are trading near record highs, inflation concerns are still very much in the forefront of the market," said Suki Cooper, metals analyst at Barclays Capital.

"We are likely to see range-bound trade in the near term, with a bias on the upside. We need some catalyst, such as a rapid weakening of the dollar or movements in equity markets, to drive prices substantially higher," she said.

A weaker dollar makes gold cheaper for holders of other currencies and often lifts bullion demand. The metal is also generally seen as a hedge against oil-led inflation.

Oil hit a record high near $124 a barrel before easing.

Gold has lost about 15 percent in value since spiking to a lifetime high of $1,030.80 on March 17, mainly driven by profit taking and declines in other commodities.

"Crude oil is a pillar of support for precious metals. Amid the low trading volumes, gold and silver prices have been sticky, resisting major downward pressures so far this week," said Walter De Wet, analyst at Standard Bank.

DOWNSIDE RISK

But some analysts said the metal would struggle to retain gains and might slip further in coming weeks.

"With our fundamental and technical forex strategists negative euro/dollar and our oil strategist unenthusiastic about the prospects for further gains in crude oil, we continue to favour the downside in gold, targeting $850 in one month and $800 in three months," UBS Investment Bank said in a report.

Gold futures also rose, with the June delivery contract on the COMEX division of the New York Mercantile Exchange gaining $6.60 an ounce to $877.80.

"It's hard to see a clear trend at the moment on gold. Probably we are going to bounce around in the near term," said Michael Widmer, metals analyst at Lehman Brothers.

In other markets, spot platinum rose to a high of $2,000 an ounce before easing to $1,989/2,009, versus $1,949.50/1,969.50 late on Wednesday.

In industry news, Lonmin Plc, the world's third biggest producer, posted a 63 percent jump in first-half profit on strong prices, but withdrew a long-term output target due to South African power problems.

The company, listed in London and with operations in South Africa, had been aiming to boost output to 1.2 million ounces by 2012 by building new mines, but said on Thursday this was now in doubt, Chief Executive Brad Mills said.

Silver rose 1.2 percent to $16.80/16.86 an ounce from $16.60/16.66, while palladium rose to $428/436 an ounce from $420.50/428.50 late on Wednesday.