PRECIOUS-Gold falls on higher dollar, but euro crisis supports

Mon Sep 19, 2011 10:15am EDT

(Releads, updates prices)

* Anglogold expects gold to hit $2,200 by 2012

* Low interest rates support gold purchases

* Fed's Tuesday/Wednesday meeting a focus

By Pratima Desai

LONDON, Sept 19 (Reuters) - Gold fell on Monday as the dollar rallied, but European policy makers' failure to soothe fears of Greek default and contagion to other euro zone countries will support prices as investors to seek refuge in the precious metal.

Spot gold was bid at $1,793.90 a troy ounce at 1405 GMT from $1,810.73 late in New York on Friday. The precious metal hit a record high of $1,920.30 on September 6.

A stronger U.S. currency makes dollar-denominated metals more expensive for holders of other currencies. Gold has so far on Monday ranged between $1,827.36 and $1,788.99 an ounce.

The cancellation of a visit by Greek Prime Minister George Papandreou to the United States to chair an emergency cabinet meeting at home and a regional election defeat for German Chancellor Angela Merkel added to perceptions of a worsening crisis.

"Given ongoing problems in the euro zone and the financial system, safe-haven demand should remain strong," said Carsten Fritsch, analyst at Commerzbank.

EU finance ministers at meetings ending on Saturday broke no new ground in dealing with the crisis and made no decision on whether to give more firepower to the 440-billion euro bailout fund as suggested by U.S. Treasury Secretary Timothy Geithner. .

Markets are expected to focus on a policy meeting of the U.S. Federal Reserve on Tuesday and Wednesday. Any announcement of further stimulus for the economy could help buoy gold prices.

"Despite the FOMC meeting taking centre stage this week, Europe is still likely to hold the market's attention as IMF/EU inspectors will be in Greece," UBS said in a note.

Also a focus for the gold market is the London Bullion Market Association's conference in Montreal, Canada.

OPPORTUNITY COST

Gold prices are expected to hit $2,200 by 2012, supported by the economic uncertainties in Europe and the United States, said the chief executive of AngloGold Ashanti , the world's third-largest gold producer.

"The European sovereign debt crisis remains unresolved, underpinning investment demand, and we see an extended period of negative real interest rates," Morgan Stanley said in a note.

Low or negative interest rates mean there is no opportunity cost to holding gold as major currencies such as the dollar, yen or sterling yield little or nothing in interest.

The Federal Reserve, facing rising global financial strains and recession fears, is poised to increase downward pressure on longer-term interest rates next week in a bid to help the sputtering U.S. recovery.

"Beyond near-term weakness, we remain positive on gold as uncertainty heightens over Europe and the near-term outlook for the U.S., as well financial market instability," Barclays Capital said in a note.

"(Gold's) downside has been cushioned by physical demand and looks to be increasingly supported amid the seasonally strong period for demand."

Analysts expect gold to be supported at $1,800 an ounce, a level at which Asian buyers have been seen returning to buy. On the upside, gold is likely to zigzag up towards $1,930 an ounce, with an immediate target at $1,860, said Reuters market analyst Wang Tao.

Silver tracked gold lower. It was at $39.40 an ounce from $40.60 late on Friday.

Platinum was at $1,791.74 from $1,804.83 and palladium at $716.00 from $727.05 an ounce.

Platinum and palladium have recently come under pressure from expectations of weaker demand from the auto industry, which uses precious industrial metals to make catalytic converters for cars.

(Editing by William Hardy and Jason Neely)