Gold rises on physical buying as stocks tumble

By Frank Tang and Pratima Desai

NEW YORK/LONDON (Reuters) - Gold prices ended higher on Thursday, buoyed by interest from jewelry makers and as investors sought safety after U.S. stocks plunged nearly 7 percent on mounting worries about a deepening economic slump.

Spot platinum fell to a three-week low of $764.50 an ounce, a fall of nearly 6 percent from Wednesday's close of $808.50, as news from the auto industry reinforced demand worries for the metal used in autocatalysts.

Spot gold was at $748.50 at 2:12 p.m. EST, up 2.1 percent from Wednesday's close of $732.40.

"Investment demand for gold should hold up because there is strong risk aversion in the markets right now. That's why we are optimistic gold will hold up," Barbara Lambrecht, analyst at Commerzbank, said.

Broad-based Standard & Poor's 500 index .SPX slumped to its lowest level since April 1997 in Thursday's late trade, while the blue-chip Dow Jones industrial average lost nearly 500 points to about 7,500. .N

Gold is used as a hedge against turmoil in financial markets -- equity prices in Europe and the United States are trading at their lowest levels in more than five years. .EU .N

U.S. gold futures for December delivery settled up $12.70, or 1.7 percent, at $748.70 an ounce on the COMEX division of the New York Mercantile Exchange.

Carlos Sanchez, precious metals analyst at CPM group, said the ongoing strength of the physical gold market, featuring unprecedented demand for gold coins and bars, lifted prices on Thursday.

Data from the World Gold Council showing an 18 percent jump in demand for gold to 1,334.4 tonnes and a 56 percent rise in investment demand to 382.1 tonnes in the third quarter has helped sentiment.

Bullion is also used as an alternative currency to the dollar when it is falling. But when the U.S. currency is rising it makes metals denominated in dollars more expensive for holders of other currencies.

The dollar rose against the euro as investors bought U.S. short-term Treasury bills as a safe haven.

"Gold is following the dollar closely," Lambrecht said. "There is a risk recession could dampen jewelry demand."

DEFLATIONARY IMPULSE

Fears of rising inflationary pressures, crisis in credit markets and the dollar's collapse earlier this year pushed gold prices to a record $1,030.80 an ounce in March.

But now weighing on gold is the prospect of deflation, with recession now a reality in Japan and Germany.