Gold rises slightly as dollar broadly drops

By Frank Tang

NEW YORK (Reuters) - Gold futures ended slightly higher on Friday, losing some of their initial upward momentum based on a broadly weaker dollar, and the metal could continue to be rangebound because of weakened investment demand.

The price of gold has largely moved in a broad range between $920 and $940 this week, as the combination of the resurgent dollar and easing inflation worries put a damper on bullion's rise.

Analysts said that the recent encouraging U.S. data had hampered gold's rise, as the danger of fresh crises in financial markets appeared less imminent.

"One of the reasons gold has been bought has been as an insurance premium against inflation, or against systemic risk from another camp of investors," said Peter Fertig, an analyst with Quantitative Commodity Research. "At least for the latter group, their need to hold gold has clearly been reduced."

U.S. August futures settled up $1.50 at $941 an ounce on the COMEX division of the New York Mercantile Exchange.

Spot bullion was at $940.60 by 2:25 p.m. EDT, up from $938.55 quoted late on Thursday in New York. Earlier in the session, it hit a two-week high above $948.20 per ounce -- last seen June 12, when the dollar tumbled against a basket of currencies.

Data released earlier showed U.S. consumers were slowly regaining confidence in their economy and personal income rose more than expected in the past month.

NEW RESERVE CURRENCY?

Gold could receive a shot in the arm as China and some other central banks recently indicated they would consider to diversify their reserves into a basket of major currencies out of the dollar.

China's central bank renewed its call on Friday for the creation of a super-sovereign reserve currency to reduce the dollar's global domination.

On Thursday, the head of the economic department of China's Communist Party policy research office said the country should buy more gold, and that purchasing land in the United States was a better option for China than buying U.S. treasuries.

However, market watchers said it was unlikely that the dollar's world reserve currency status would be challenged in the foreseeable future.

Inflows into gold-backed exchange-traded funds waned, reflecting weak fundamental demand for gold from retail investors and the jewelry market.

Holdings at the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, fell 0.5 percent to 1,125.74 tonnes as of June 25, down 5.5 tonnes from the previous business day.

On the supply side, South Africa's Gold Fields Limited (GFIJ.J) expected to beat guidance and increase production by 4 percent in the fourth quarter of 2009.