Gold retreats from record high after Japan quake

A gold bar is pictured during its stamping at the Austrian Gold and Silver Separating Plant 'Oegussa' in Vienna February 28, 2011.

NEW YORK (Reuters) - Gold was little changed on Thursday afternoon, retreating from a record high after another strong earthquake hit Japan.

In early trading, gold rose to a record for a third straight session on inflation worries and expectations that the European Central Bank's first rate hike since 2008 would weaken the dollar.

Crude oil and global equities also retreated after a strong earthquake shook Japan, pressuring gold. The dollar strengthened against the euro instead of weakening as many had expected, which put further pressure on gold.

Even though the European Central Bank raised rates, investors were not convinced that more rate hikes were on the way.

"You're back to a dollar story for the first time in a long time." said Frank McGhee, head precious metals trader of Integrated Brokerage Services. "Gold prices and the dollar both benefit from that rate hike because it increases the differentials between euro zone and the U.S. interest rates."

Rising interest rates generally are negative for gold, but investors bought bullion immediately after the ECB rate hike because they expected the dollar to weaken in the future.

Spot gold hit a record $1,464.80 an ounce and was later down 0.1 percent to $1,456.14 at 1:14 p.m. EDT. U.S. gold futures for June delivery eased 0.1 percent to $1,357.50 an ounce.

The ECB raised rates by 25 basis points to 1.25 percent to counter inflation pressure. Gold has risen more than 2 percent this week, benefiting from rallies in crude oil and corn and as Portugal requested a European Union rescue package.

"Of course the ECB will be vigilant in monitoring inflation developments very closely. But it is more inflation expectations that made the ECB concerned, and less the actual increase (in inflation)," said Peter Fertig, a consultant at Quantitative Commodity Research.

ECB President Jean-Claude Trichet said the rate hike was not necessarily the start of a series, disappointing some who had expected a more hawkish tone.

The traditional inverse correlation between gold and the dollar appeared to be strengthening this week to a negative 0.8, as gold hit successive records, but the link could be erratic in the near term. A correlation of minus 1 indicates a perfect inverse link, while a correlation of plus 1 indicates that both are moving in perfect tandem.

SILVER EDGES UP, BUT OFF 31-YEAR HIGH

Among other precious metals, silver gained 0.2 percent at $39.50 an ounce, just off the previous session's 31-year high at $39.75.

Silver has not shaken its image of an unpredictable metal with high volatility and chronic oversupply, but investors seem set on driving prices beyond the recent 31-year high.

On fundamentals, industrial demand for silver is expected to rise less than 10 percent this year, after prices more than doubled to 31-year highs since late 2010, the head of metals research and consultant GFMS said on Thursday.

Platinum was down 0.4 percent to $1,781 an ounce, while palladium shed 0.2 percent to $776.50.

(Additional reporting by Jan Harvey in London)