Jewelery, investment demand buoy gold

LONDON (Reuters) - Gold prices rose on Thursday, buoyed by interest from jewelery makers and investors seeking safety, but a stronger dollar against the euro and lower oil prices are expected to weigh on sentiment.

Spot platinum was bid at a three-week low of $770.50 an ounce, a near five percent fall from Wednesday, as news from the auto industry reinforced demand worries for the metal used in autocatalysts.

Spot gold was quoted at $748.25/750.25 an ounce at 11:06 a.m. EDT from $732.40 in New York late on Wednesday when it touched $762.30 an ounce, its highest in more than a week.

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.

"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.

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

It 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 hit a one-week high against the euro after the U.S. Federal Reserve slashed growth forecasts for the world's largest economy in 2009, which analysts say could mean deep interest rate cuts. <USD/>

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

"Deflationary impulses in the economy, according to monetary theory, are negative for gold prices, as they increase the purchasing power of currencies and reduce the need to own gold as an inflation hedge," HSBC said in a note.

"A low risk of outright deflation may help put a floor under gold prices ... The inability of oil to rally is another sign of deflation."

Crude oil slid below $50 a barrel, the lowest since January 2007. Prices are down more than 60 percent since a record above $147 a barrel in July on the weak outlook for demand. <O/R>

Growth fears have also hit platinum used to make autocatalysts that clean car emissions. Platinum prices have plunged from $2,290 an ounce in March.

News of falling car sales and a rapidly deteriorating outlook for the auto sector accelerated the sell-off.

Doubts about whether a $25 billion rescue plan to bail out U.S. auto makers will be passed has further damaged sentiment.

Platinum was quoted at $773/793 an ounce from $808.50 late on Wednesday.

Silver tracking gold lower lost 5 percent to hit $8.79 and was last at $8.95/9.03 from $9.24.

Palladium jumped more than 6 percent to $192 an ounce on bargain hunting during the morning session. It was last at $175/183 from $180.50.

(Reporting by Pratima Desai; editing by Editing by Peter Blackburn)