Gold recovers after U.S. inflation data, oil rally

NEW YORK/LONDON Tue Dec 15, 2009 5:15pm EST

Gold bars are displayed to be photographed at bullion house in Mumbai in this December 3, 2009 file photo. REUTERS/Arko Datta

Gold bars are displayed to be photographed at bullion house in Mumbai in this December 3, 2009 file photo.

Credit: Reuters/Arko Datta

NEW YORK/LONDON (Reuters) - Gold pared early losses to seesaw for the rest of Tuesday's session as investors struggled between selling into dollar strength and buying the inflation potential of an unexpected jump in producer prices and rallying oil.

U.S. inflation data for November came in higher than expected, boosting interest in the yellow metal as a hedge against rising prices.

Oil prices rose for the first day in 10, moving above $70 a barrel as traders bet that government data will show U.S. crude inventories fell last week and that colder-than-normal weather will boost demand for heating oil.

Earlier, prices fell more than 1 percent as the dollar rose versus the euro. But inflation fears lifted gold back into positive territory, with momentum picking up as traders bought back short positions, or bets prices will fall.

Spot gold slipped to $1,123.70 an ounce by 2:47 p.m. EST (1947 GMT), from $1124.20 in the late Monday New York session. Earlier it fell as low as $1,111.20 an ounce.

"The oil market was rallying on speculation that inventories would be bullish as well as technical factors, and it pulled gold up with it on a potential inflation basis," said MF Global precious metals and energy analyst Tom Pawlicki in Chicago.

Government data showed U.S. producer prices rose more than forecast in November as energy costs soared. Gold is often seen as an inflation hedge.

"Gold found some buying interest after U.S. inflation data came out higher than expected, playing out its role as an inflation hedge," said Heraeus trader Alexander Zumpfe.

A rise in the dollar versus the euro kept pressure on gold, however, as concerns about euro zone banks helped prompt short covering in the safe-haven dollar. <FRX/>

While some analysts said they think gold may remain rangebound until year end, they added that Wednesday's Federal Reserve policy-setting meeting could send gold prices out of its recent trading band. No change is expected on U.S. interest rates, currently near zero, but the Fed's communique could signal changes down the road.

SKEPTICAL

"A rate rise is still not expected until 2H10, but dollar sentiment could be gradually improving, and this would slow down a much expected price recovery in gold in early 2010," said VTB Capital analyst Andrey Kryuchenkov in a note.

On the physical side of the market, India's gold traders picked up bargains in the middle of the wedding season, dealers said.

Meanwhile, holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust GLD.N, rose 0.304 tonnes on Monday to 1,116.551 tonnes. <GOL/SPDR>

The SPDR saw its biggest outflow since July last week, amid a fall in gold prices to four-week lows. This consolidation has allowed gold to build a base for further gains, analysts say.

"I think the recent retrenchment will simply be a buying opportunity," said David Wilson, an analyst at Societe Generale. "A rescaling of $1,200 an ounce isn't beyond the realms of possibility."

By late New York trade, other precious metals showed silver bid higher at $17.38 an ounce against $17.36, platinum added to $1,444.50 an ounce against $1,443.50, and palladium eased to $362.50 against $364.50.

(Editing by Christian Wiessner)

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