Gold rises on weaker dollar, equity rally

LONDON Mon Dec 15, 2008 5:10am EST

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LONDON (Reuters) - Gold climbed in Europe on Monday as the dollar weakened against the euro and the yen, boosting interest in the metal as a currency hedge, and gains in equities and other commodities fueled buying appetite.

Spot gold was quoted at $826.90/828.90 an ounce at 0950 GMT, against $819.90 an ounce in New York late on Friday.

Traders are looking ahead to a decision on U.S. interest rates on Tuesday, after the Federal Open Market Committee's two-day policy meeting.

A cut in rates is likely to have a significant impact on the foreign exchange market, and consequently on gold.

"We have the Fed interest rate decision this week... which should be the last big event of the year," said Afshin Nabavi, head of trading at MKS Finance in Geneva.

"Everyone is banking on a lower interest rate in the U.S. If the dollar continues to lose value, of course it will benefit gold."

Gold was reacting to a move higher in the euro versus the dollar, with selling of physical gold stocks in the Far East and technical resistance keeping a lid on gains, he said.

Gold tends to track the euro/dollar exchange rate closely, as it is often bought as an alternative investment to the U.S. currency and tends to move in the opposite direction to it.

The dollar slipped against both the yen and the euro, striking a two-month low against the single currency as traders weighed comments from European Central Bank officials suggesting rate cuts may not be imminent.

Interest rate differentials between the United States and the euro zone are likely to widen, dealers said. The Federal Reserve is widely seen cutting rates by at least 50 basis points on Tuesday.

Equity markets are also rallying, demonstrating a sharper appetite for risk that is also buoying commodities. Asian stocks climbed nearly 4 percent on hopes the U.S. car industry will be bailed out. European shares rose at the open.

COMMODITIES FIRM

Firm buying interest also trickled into other markets, with commodities such as oil and industrial metals posting strong gains in Asian trade. Oil rose more than $1 a barrel on expectations of a deep OPEC supply cut.

Among other precious metals, spot silver tracked gold higher to $10.36/10.44 an ounce, against $10.23 in New York late on Friday.

The platinum group metals benefited from hopes for a bail-out of the U.S. automotive industry. Carmakers are major buyers of PGMs and weakness in the sector has pushed prices sharply lower in recent months.

"The Senate's rejection of the U.S. automakers' bailout deal put the PGMs in a weaker mood Friday," The BullionDesk.com analyst James Moore said.

"The metal has jumped over 3 percent this morning from Friday's close of $818 amidst renewed hope of a rescue deal for the beleaguered U.S. automakers."

News that major platinum producer Aquarius Platinum (AQP.L) will keep its Everest mine in South Africa closed for at least six months is also likely to support prices.

Spot platinum climbed to $831.50/851.50 an ounce from $805.50 an ounce, while palladium surged to a high of $178, before easing back to $172.50/180.50 an ounce, up from $168 late on Friday.

(Editing by Sue Thomas)

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