Gold back above $950 on weak dollar, firm oil

By Frank Tang and Atul Prakash

NEW YORK/LONDON (Reuters) - Gold ended higher and near a one-week high above $950 an ounce on Wednesday as a falling dollar and strong oil prices encouraged investors to shift money back into the market after last week's heavy sell-off.

However, gold could further consolidate before testing new highs after a tumultuous price drop last week had put a damper on the yellow metal's run, market watchers said.

Gold rose as high as $951.60 an ounce and was at $949.00/949.80 by New York's last quote at 2:15 p.m. EDT, against $934.60/935.40 late in New York on Tuesday.

"We saw some pretty big falls last week and there has certainly been an increase in buying over the last day or so from investors who think those falls were overdone," said Daniel Hynes, metals strategist at Merrill Lynch.

Gold hit a record of $1,030.80 on March 17 before a broad sell-off in commodities dragged down prices to a one-month low of $904.65, briefly hurting investor confidence in the metal, seen as an alternative investment and a hedge against inflation.

The dollar slumped for a second straight session after an unexpected fall in U.S. durable goods orders bolstered worries about the economy's health, which could prompt further interest rate cuts.

Higher-than-expected U.S. new home sales numbers also failed to stop a slide in the dollar.

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

Soaring energy prices boosted gold's appeal as a hedge against inflation. U.S. crude futures ended up $4.68 at $105.90 a barrel.

"We are still going to have another leg up towards $1,000, but I think it might be slower than the run up we saw the last time," said Suki Cooper, metals analyst at Barclays Capital.

In other markets, the active U.S. gold contract for April delivery on the COMEX division of the New York Mercantile Exchange settled up $14.20, or 1.5 percent, at $949.20 an ounce.

OUTLOOK CAUTIOUS

However, dealers said that gold could run into strong resistance due to chart-based weakness and lost momentum among gold bulls.

"This rally that we are seeing (now) is just a corrective rally. I think it's going to have problems between $965 to $980, and you will see professional selling coming to the market at that point of time," said Adam Hewison, president of MarketClub.com, Annapolis, Maryland.

James Steel, metals analyst with HSBC in New York, told clients in a note that commodities prices, including gold and other precious metals, had ample opportunity to extend declines further during the recent correction because investors had reduced or eliminated their exposure to commodities.