Gold drops from 11-month high after U.S. payrolls

Gold bars are displayed at a gold jewellery shop in the northern Indian city of Chandigarh May 8, 2012.

NEW YORK (Reuters) - Gold hit an 11-month high early on Friday then retreated to end lower after bullion's appeal as an inflation hedge was dampened by a surprising drop in U.S. unemployment rate to a four-year low.

Weaker crude oil futures also weighed on the precious metal after the Labor Department said the U.S. unemployment rate dropped to 7.8 percent in September, the lowest President Barack Obama took office and well under the 8.2 percent expected by economists.

Open interest in U.S. gold futures rose to a one-year high while bullion held by the No. 1 gold exchange-traded fund SPDR Gold Trust climbed to a record, underscoring renewed investor focus in trading the precious metal.

U.S. crude futures' second sharp losses in three days also prompted some gold investors to cut bullish bets after bullion failed to break above $1,800 an ounce following several attempts this week.

"The payrolls data took some immediacy out of any additional Fed stimulus action. The falling premium in crude is also taking a big bite out of the inflation bid," said Frank McGhee, head precious metals trader of Integrated Brokerage Services Llc.

"Gold at $1,800 might look a bit more distant now," McGhee said.

Spot gold was down 0.6 percent at $1,777.19 an ounce by 2:19 p.m. EDT (1819 GMT), having earlier hit $1,795.69 the highest price since November 9, 2011.

For the week, the metal showed a 0.4 percent gain following nearly flat performance in the previous two weeks.

U.S. COMEX gold futures for December delivery settled down $15.70 at $1,780.80, with volume around 10 percent below its 30-day average, preliminary Reuters data showed.

Silver fell 1.5 percent to $34.42 an ounce.

Analysts said the U.S. data showed the world's largest economy was not heading back into a recession, and had encouraged investors to take on riskier bets with equities up.

The payrolls report had been keenly watched for clues on how long the Fed will continue adding $40 billion a month to the system through purchases of mortgage-backed securities.

Investors are looking at gold as their top commodities choice and a safe-haven against what may be a turbulent fourth quarter, given a possibility that the so-called U.S. "fiscal cliff" of automatic spending cuts and tax increases will shrink the economy and lead to more money printing.

Major gold ETFs monitored by Reuters added over 0.4 million ounces of bullion on Thursday, as SPDR Gold Trust reported record holdings of 1,333.44 metric tons of bullion. <GOL/ETF>

S.AFRICAN MINING STRIKES

Mining strikes in South Africa, accounting for 80 percent of the world's platinum reserves, failed to support prices among the platinum group metals.

Anglo American Platinum (AMSJ.J), the world's top producer of platinum, said it had fired 12,000 workers who had participated in a three-week illegal strike. Amplats said the work stoppage had cost it 39,000 ounces in lost output.

Spot platinum eased 0.3 percent on the day at $1,703.49 an ounce, after reaching a seven-month high earlier in the session. The metal still posted a weekly rise of more than 2 percent.

Spot palladium was down 1.2 percent to $660.50 an ounce.

(Additional reporting by Clare Hutchison in London and Rujun Shen in Singapore; Editing by Marguerita Choy and Alden Bentley)