UPDATE 5-Stronger dollar expected to cap gold's gains

Thu Nov 13, 2008 11:01am EST

Related Topics

* Investors opting for U.S. Treasuries over gold

* Receding inflation fears weigh on sentiment

* Investor selling could accelerate if gold falls below $700

(Updates prices)

By Pratima Desai

LONDON, Nov 13 (Reuters) - Gold rose on Thursday as bargain hunters entered the fray, but analysts said gains will be capped by the stronger dollar and receding inflation fears.

Spot gold XAU= was at $718.90/720.90 an ounce at 1541 GMT from $711.35 an ounce in New York late on Wednesday, when it slipped to $707.80, its weakest since October 27. Earlier it briefly touched $725 an ounce.

The dollar retreated against the euro, but it is still up more than 20 percent since hitting a record high above $1.60 in July. [USD/]

"Gold will struggle in an environment where the dollar is strengthening," said Calyon analyst Robin Bhar.

"Safe-haven buying will continue to underpin the gold price, but it looks as if people are more inclined to move into U.S. Treasury bonds and bills."

Any move by investors into U.S. government bonds will boost the U.S. currency, which, when it is rising, makes metals priced in dollars more expensive for holders of other currencies.

The dollar has been rising since August when markets realised the financial crisis and economic slowdown would not be confined to the United States.

"We are revising our gold forecasts lower on Goldman Sachs currency revisions as USD shifts are the dominant driver of gold prices," Goldman Sachs said in a note. [ID:nN12464746]

Gold prices have tumbled by about 30 percent since hitting a record high of $1,030.80 an ounce in March.

"Should gold break through $700 an ounce we are concerned that the metal could continue to fall as ... investors may liquidate into an already weakening market," investment bank Fairfax said in a note.

RECEDING INFLATION FEARS

Gold is also used by investors as a hedge against financial market turmoil and inflation, which erodes the value of money.

Worries about global recession, consumer belt-tightening and falling oil and industrial metals prices have all contributed to easing inflationary pressures and in fact markets are now talking about the likelihood of deflation. [COM/WRAP]

"Inflation is no longer in the equation for the global economy. People don't need to be protected from it," a London-based trader said.

Gold gained earlier this year as the credit market crunch stoked volatility across financial markets. But coordinated central bank action to pump money into the banking system and cut interest rates is helping to ease the crisis.

"Credit market developments continue to weigh on gold prices, we believe, although the evidence is not clear cut," HSBC said in a note.

"An important argument for higher gold prices is strong underlying physical demand for gold globally, most notably in India, the Middle East, and China."

Chinese gold investment hit 38.4 tonnes in the first nine months of this year against 24 tonnes for 2007. [ID:nPEK182184]

Platinum XPT= fell nearly 4 percent to $780 an ounce, the lowest since Oct. 31 and was last at $820/840 an ounce from $810 late on Wednesday.

Prices of the metal used to make autocatalysts have plunged about 65 percent since a record high of $2,290 hit in March.

The sell-off was trigged by collapsing auto sales and the deteriorating outlook for the car industry.

"There could be fresh falls in platinum prices next year, it would not be unexpected," Bhar said.

Palladium XPD= was at $212/220 from $210 on Wednesday and silver XAG= at $9.19/9.27 from $9.30. (Reporting by Pratima Desai; editing by Karen Foster)

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