Gold rises on economic optimism but seen vulnerable

Gold pendants are displayed at Habib Jewels' boutique in Kuala Lumpur September 17, 2009.

NEW YORK/LONDON (Reuters) - Gold ended a hair higher on Monday after initially rising toward $1,000 an ounce, with currency factors dominating direction, but analysts said the market remained vulnerable to fresh losses after short-term investors lightened positions last week.

On Monday, a wave of economic optimism prompted investment inflows into asset classes across the board, bolstering the status of gold as a hedge against inflation. Wall Street rose nearly 2 percent, while crude oil futures also jumped $1, to $67 a barrel.

U.S. December gold futures settled up $2.50 at $994.10 an ounce on the COMEX division of the New York Mercantile Exchange.

Spot gold stood at $991.25 an ounce at 2:45 p.m. EDT, slightly up from $990.95 an ounce late in New York on Friday.

A bout of heavy selling last week took the market sharply below the psychologically significant $1,000 mark.

"We will need to see ongoing good physical and ETF demand or otherwise the weight of spec longs in the market might trigger some disappointed long liquidation," said Simon Week, director of precious metal sales at Bank of Nova Scotia in London.

Bullion's failure to stay above $1,020 an ounce prompted an unwinding of long positions on the COMEX gold futures market. Long positions -- buying to profit from further gains -- had hit a record high last week for a third straight week.

John Reade, head of metals' strategy of UBS, said that gold and silver could trade much lower in coming weeks if the dollar remained strong, and broader asset markets stayed under pressure.

DOLLAR RISE ERASES GOLD GAINS

On Monday, initial gains in gold dissipated as the dollar accelerated gains versus the euro. A stronger dollar makes gold and other commodities priced in the U.S. unit less attractive for non-U.S. investors.

But with most analysts maintaining a bearish stance on the dollar, gold was still seen standing in good stead for another attempt on the March 2008 record high scored at $1,030.80.

"The dollar feels like it has to go much lower from where it is and gold could benefit from that," said Afshin Nabavi, head of trading at MKS Finance.

In the physical market, however, dealers said demand was supportive for gold at the lower levels with Asia-based operators seeing jewelry demand pick up in India as the festive period approaches.

In other precious metals, silver took a lead from the slight rally in gold and climbed to $16.16 from $16.00

Platinum stood at $1,274 from $1,272.50 and palladium was at $287 from $288, its late Friday quote in New York.

(Additional reporting by Veronica Brown in London; Editing by Christian Wiessner)