Gold pares losses on oil surge, platinum off lows

By Atul Prakash

LONDON (Reuters) - Gold recovered from session lows on Monday after a sharp decline, as record high oil prices and a weaker dollar attracted investors and speculators back into the market.

Palladium fell nearly 6 percent to a three-week low before partially recovering, while platinum trimmed losses after slipping about 5 percent to its lowest level in one month.

Analysts said gold was likely to trade in a range ahead of a U.S. Federal Reserve meeting next week, but expectations of further interest rate cuts in the United States were likely to support the market over the medium to long-term.

Spot gold fell as low as $961.00 an ounce and was quoted at $968.75/969.00 at 1528 GMT, against $972.60/973.40 late in New York on Friday.

"The market was feeling a bit toppish, but now with oil trading at around $107 a barrel, people are regretting their sales and tip-toeing back to gold for sure," said David Holmes, director of metals sales at Dresdner Kleinwort.

"The market is characterized by volatility. A lot of the price action is speculative and people are quick to get in and out of the market at the moment."

Oil hit a record high of $107 a barrel, reversing earlier losses as investors bought oil as a hedge against a depressed dollar and inflation.

Gold is generally seen as a hedge against oil-led inflation. The metal also often moves in the opposite direction to the dollar as a weaker U.S. currency makes the metal cheaper for holders of other currencies and lifts bullion demand.

The dollar marginally fell against the euro after rising.

"The upward trend is still in place. People are just waiting for something to take it up towards $1,000 or may be above it," said Michael Widmer, metals analyst at Lehman Brothers.

"I wouldn't be surprised if prices didn't do a lot ahead of the next week's Fed meeting and, the closer we get, the less likely that people are to take big positions."

CONSOLIDATION PHASE

People were cautious as the Fed meeting would give a lot of information on issues such as the U.S. interest rate outlook and the health of the U.S. economy, Widmer said.

Gold hit an historic high of $991.90 an ounce on March 6 before funds cashed in. The metal had gained nearly 20 percent in 2008, on the top of a 32 percent rise last year.

"The metal's failure to break higher on Friday suggests the market may, just for the short-term, be in need of a phase of consolidation before challenging $1,000," said James Moore, precious metals analyst at TheBullionDesk.com.