Gold ends up on inflation fear

By Jan Harvey

LONDON (Reuters) - Gold ended sharply higher after surging to a 10-week high on Tuesday as rising oil prices fueled buying of the precious metal as an inflation hedge.

Weak stock markets also increased gold's appeal as an alternative investment, further buoying prices, traders said.

Gold XAU= was at $938.40/939.40 by New York's last quote at 2:15 p.m. EDT (1815 GMT) from $925.95/927.15 in New York late on Monday. It touched a session high of $945.80, its strongest level since April 17.

"Oil is strong," said Commerzbank trader Michael Kempinski, adding that inflation is a continuing worry.

"There has also been a bit of safe-haven buying as the European stock markets have crashed," he added.

The U.S. gold contract for August delivery GCQ8 on the COMEX division of the New York Mercantile Exchange settled up $16.20, or 1.8 percent, at $944.50 an ounce.

The August futures have now gained $73.30, or nearly 8 percent, from a session low of $875.20 on June 25.

Oil prices resumed their move higher, trading up more than $3 a barrel at their session high on Tuesday after a report from the International Energy Agency forecast oil supply would remain tight.

However, U.S. oil futures ended just 97 cents higher at $140.97 a barrel.

High oil prices are fueling fears of inflation, against which gold is often bought as a hedge. Strength in oil also tends to stimulate interest in commodities as an asset class.

Equity market weakness is also fueling buying of gold as a safe haven.

The FTSEEurofirst 300 index .FTEU3 ended sharply lower, while U.S. stocks retraced early losses in late trade as better-than-expected auto sales improved momentum.

Meanwhile the dollar was steady against the euro for much of the day, before strengthening after a report showed U.S. manufacturing activity was stronger than expected in June.

However, the U.S. currency has since given up those gains and is trading lower against the euro.

Traders are also looking ahead to the European Central Bank's upcoming decision on interest rates, due Thursday. Speculation over interest rates on both sides of the Atlantic has had a significant impact on gold.