Gold ends nearly 3 percent up on oil rally, weak jobs

By Frank Tang and Pratima Desai

NEW YORK/LONDON (Reuters) - Gold ended nearly 3 percent higher on Friday to a 1-week high on the back of record crude oil and the dollar's drop after data showed a sharp rise in the U.S. unemployment rate and as equity markets slipped on worries about economic growth.

Gold rose to a high of $900.30 a troy ounce and was last at $896.80/898.20 an ounce by New York's last quote at 2:15 p.m. EDT, compared with $874.55/875.95 late in New York on Thursday, when it hit $864.45 -- its lowest level since May 15.

"There've been significant inflation fears out there, and they were alleviated for a few days with oil backing off, but the last two days' gains in the oil market have put inflation right back on the front burner," said Bill O'Neill, managing partner of LOGIC Advisors in Upper Saddle River, New Jersey.

U.S. crude futures soared more than $10.75 to end at record $138.54 a barrel on Friday, bringing gains in the last two days to $15 and boosting gold's appeal as a hedge against inflation.

"You don't have to look much further than that to see why gold should be up," O'Neill said.

The active U.S. August gold contract on COMEX division of New York Mercantile Exchange settled up $23.50, or 2.7 percent, at $899.00 an ounce.

U.S. employers shed jobs for a fifth straight month in May and the unemployment rate jumped to its highest in more than 3-1/2 years, a Labor Department report showed.

"Gold rallied in line with moves down in the dollar. The worry is if unemployment is climbing, then mortgage defaults and subprime losses rise," said David Thurtell, analyst at BNP Paribas.

U.S. unemployment rose to 5.5 percent in May from 5 percent, its highest since October 2004. Some 49,000 jobs were cut from payrolls in May, up from a revised 28,000 that were lost in April.

"The news is bearish for equities -- so gold benefits as an alternate asset class," Thurtell said.

U.S. stocks dropped 3 percent in late trade on Friday.

Meanwhile, O'Neill said that record crude oil combined with weak U.S. economic news could hamper the U.S. Federal Reserve's ability to cut rates further, and that should bode well for gold in the near term.

Gold is traditionally used as a hedge against financial uncertainty, which often manifests itself in dollar weakness. It also makes commodities priced in the U.S. currency cheaper for holders of other currencies.

GOOD DAY FOR GOLD

Also weighing on the dollar and boosting the euro and precious metals was a speech by European Central Bank president Jean-Claude Trichet, who said on Thursday that the central bank was on high alert over inflation.