Gold ends lower despite oil rally, weak dollar

NEW YORK/LONDON (Reuters) - Gold ended lower on Thursday in spite of a sharp crude oil rally and weaker dollar, but bullion should be supported by chart-based strength ahead of Friday's U.S. payrolls report, traders said.

Gains in bullion were capped by uncertainty over the future direction of the U.S. currency and by expectations that demand would remain muted going into the typically slack third quarter, dealers said.

Spot gold was last at $874.55/875.95 an ounce by New York's last quote at 2:15 p.m. EDT (1815 GMT), against $878.30/879.70 an ounce late in New York on Wednesday.

"Gold has come back off lows, but there is still a lot of caution," said Mitsubishi metals strategist Tom Kendall. "The market is very sluggish in terms of end-user demand. There is not a lot of support from jewelry buyers."

Price volatility this year has made jewelers wary of buying gold, he said.

The precious metal slipped 1.4 percent to an intraday low of $865.45 earlier, its weakest level in three weeks, as the stronger dollar dampened interest in the precious metal as a currency hedge.

The euro touched a three-week low against the dollar after European Central Bank President Jean-Claude Trichet signaled euro-zone interest rates could rise as early as next month, pressuring gold.

Gold typically benefits from a softer dollar, as it is bought as a hedge against currency weakness.

The dollar had benefited this week from remarks made by Federal Reserve Chairman Ben Bernanke on the worrying outlook for inflation.

Bernanke's comments were seen signaling an end to the Fed's rate-cutting trend and led some analysts to speculate that the dollar may have reached a turning point after months of decline.

"We consider (Bernanke's) comments supportive of our view that the dollar is basing -- especially against European currencies -- and that this is supportive of our view that gold peaks this year," said UBS analyst John Reade.

A fall in the price of oil from the all-time highs it reached last month is also undermining support from gold. The precious metal benefits from rising crude prices, as it is often bought as a hedge against oil-led inflation.

"We are going to look at support at levels between $850 and $860. This is just about as far low as we're going to go. I don't think the bears are going to be in complete control of this market," said Ralph Preston, futures analyst with HeritageWestFutures.com in San Diego.

Preston also cited positioning ahead of Friday's U.S. payrolls report for gold's weakness.

The U.S. non-farm payrolls data for May are due out Friday, which are likely to lend fresh direction to the currency, for clues as to the future direction of trade, analysts said.

Among other precious metals, platinum rose to $1,998/2,018 against $1,985/2,005 late in New York on Wednesday.

Palladium slipped to $423/431 from its Wednesday U.S. close of $425/433.

Meanwhile, the chief financial officer of the U.S. No. 1 silver producer, Coeur D'Alene Mines Corp, forecast the price of silver will range from $15 to $20 an ounce in the next two years, and investment demand will remain a key driver.

Silver rose to $17.14/17.20 from $16.81/16.87 an ounce late on Wednesday in the U.S. market.

(Editing by Matthew Lewis)