Gold moves higher on dollar's slump

By Atul Prakash

LONDON (Reuters) - Gold gained on Friday, with investors keen to drive the metal to a record high of $850 as the dollar tumbled to an all-time low and oil rallied.

Investment funds were eager to buy gold, with the dollar's outlook turning weaker as expectations mounted for more interest rate cuts after a downbeat economic forecast by Federal Reserve Chairman Ben Bernanke the previous day.

"The market is following the dollar and people are waiting for gold to hit $850 an ounce. Sentiment is still bullish as the market expects more cuts in U.S. interest rates and further weakness in the dollar," said Michael Blumenroth, metals trader at Deutsche Bank.

"But the market is vulnerable to a correction, with some long positions established recently. Gold could fall towards $825 before bouncing again towards the highs," he said.

Gold rose up to $838.90 an ounce and was quoted at $835.30/836.10 by 6:07 a.m. EST, against $832.10/832.85 in New York late on Thursday and a 28-year high of $845.40 on Wednesday. Gold was fixed at a record high of $850 on January 21, 1980.

The dollar hit a record low against the euro as fears grew that more U.S. financial firms will be hit by credit market turmoil, reinforcing expectations of further U.S. rate cuts.

A weaker dollar makes gold cheaper for other currency holders and often lifts bullion demand. The metal is also generally seen as a hedge against oil-led inflation.

Oil shrugged off U.S. growth concerns to climb towards the $100 milestone, fuelled by supply disruptions ahead of peak winter demand and tracking the dollar's dip to new lows.

RATIONAL RALLY?

Traders said the metal's rise in past weeks had been so fast that the danger of a sharp correction was mounting.

"Given that gold has gained $205 an ounce since August and most recently more than $50 in one week, one starts to wonder whether at least most recently rationality was completely abandoned by many of the buyers," Wolfgang Wrzesniok-Rossbach, head of marketing and sales at Germany's Heraeus, said.

"Only after a marked dip, we would recommend industrial users to start building bigger stocks again," he said in a note.

Gold has risen more than 30 percent in 3 months and doubled in leas than 3 years.

In other markets, the December gold contract on the U.S. futures market fell $0.9 to $836.6 an ounce on electronic trade after reaching a session high above $840.

"Gold is overbought now and profit-taking pressure should grow, but funds will flow into gold because it has been performing extremely well," said Tatsuo Kageyama, an analyst at Kanetsu Asset Management.