Gold up as investors seek refuge in the bullion

NEW YORK/LONDON (Reuters) - Gold prices rose on Friday, reversing early losses fueled by a stronger dollar, as investors bought the metal to hedge against currencies’ volatility and debt default risks in Europe.

An employee displays a pair of gold footwear at the 'Gem and Jewellery India International Exhibition 2010' (GJIIE) in the southern Indian city of Chennai January 23, 2010. REUTERS/Babu

U.S. gold futures for April delivery ended $3.40 higher at $1,122.10 an ounce at 3:38 p.m. EST (2038 GMT) on the COMEX division of the New York Mercantile Exchange.

“Investors are buying gold as a hedge against currencies’ volatility,” said Carlos Sanchez, a metals analyst with CPM Group. “Gold seems to be consolidating near the $1,130 an ounce area.”

Gold priced in euros hit a record high of 826.35 euros an ounce as investors sought to diversify away from the beleaguered single currency.

Spot gold was bid at $1,119.50 an ounce at 3:38 p.m. EST (2038 GMT) against $1,111.40 late in New York on Thursday, having earlier touched a low of $1,098.55.

The metal’s usual relationship with the U.S. currency -- strength in which normally weighs on the precious metal -- has weakened as fears over the outlook for paper currencies in general lifted interest in bullion as an alternative asset.

The dollar hit an eight-month high against a currency basket on Friday, extending gains after the Federal Reserve’s surprise decision to raise its discount rate, its first hike in the rate since mid-2006.


In its first interest rate move since December 2008, the Fed lifted the emergency lending rate it charges banks to 0.75 percent from 0.5 percent, but insisted borrowing costs would not rise for consumers or companies.

“This development ... is near-term gold-bearish, as it reduces liquidity,” HSBC analyst Jim Steel said in a note. “Highly accommodative monetary policies have been an important element in the gold rally.”

He noted, however, the Fed’s assertion that the change was not expected to lead to tighter financial conditions or lead to a change in the outlook for monetary policy.

“If this implies monetary policy will remain lax, then the sell-off may be brief,” he said.

On the wider markets, European shares snapped a four-day winning streak to fall as banks suffered after the Fed announcement, while U.S. stocks slipped at the open.

Among other commodities, oil prices recovered after earlier falling $1 a barrel following the Fed move. Gold tends to track crude prices, as the metal can be bought as a hedge against oil-led inflation.

Physical demand for the precious metal was relatively lackluster, with holdings of the world’s largest gold-backed exchange-traded fund, New York’s SPDR Gold Trust, unchanged for a second session on Thursday.

Buying in India, the world’s biggest gold consumer, slackened. “Caution typically sets in after a big fall,” said one Mumbai-based gold dealer.

Silver was at $16.27 an ounce, against $15.84, with platinum at $1,532 an ounce, against $1,514, and palladium at $437, against $429.50.

Close Change Pct 2009 YTD

Chg Close % Chg US gold 1122.10 3.4 0.3 1096.20 2.4 US silver 16.413 0.353 2.2 16.845 -2.6 US platinum 1543.60 24.00 1.6 1471.00 4.9 US palladium 442.35 7.10 1.6 408.85 8.2

Prices at 3:36 p.m. EST (2036 GMT) Gold 1119.60 8.20 0.7 1096.35 2.1 Silver 16.28 0.44 2.8 16.84 -3.3 Platinum 1532.00 18.00 1.2 1465.50 4.5 Palladium 437.00 7.500 1.7 405.50 7.8

Gold Fix 1112.75 5.75 0.5 1104 0.8 Silver Fix 15.95 12.00 0.8 16.99 -6.1 Platinum Fix 1513.00 7.00 0.5 1466 3.2 Palladium Fix 435.00 7.00 1.6 402 8.2

Editing by Walter Bagley and Lisa Shumaker