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Gold recovers as oil firms

LONDON - Gold recovered some lost ground on Wednesday as traders took advantage of Tuesday's price dip to buy into the market, with firmer oil prices boosting the precious metal's appeal as an inflation hedge.

The dollar has also steadied against the euro, easing downward pressure on gold.

Traders remain nervous, however, that renewed dollar strength that sparked a more than 2 percent slide in gold prices on Tuesday could pressure the metal further if it continues.

Gold XAU rose to $873.20/874.20 an ounce by 1010 GMT from $866.00/868.00 late in New York on Tuesday.

"The oil price is picking up again," said Eugen Weinberg, an analyst at Commerzbank in Frankfurt. "The dollar is the single most important factor (in the gold market) but we are also watching oil."

"Gold is an inflation hedge so if people are concerned about that they will seek protection in gold," he added.

Oil prices firmed on Wednesday after two sessions of decline as the market awaited key inventory data from the U.S. Dept of Energy, which is expected to show another drop in crude stocks.

Its recovery is helping gold, which slipped this week after U.S. Federal Reserve Chairman Ben Bernanke said the Fed would seriously resist inflation pressures, raising expectations the central bank will hike rates later this year.

Inflation

While in the long run fresh emphasis on inflation is likely to support gold, in the short term his comments have pressured the precious metal as they boosted the dollar.

Gold tends to move in the opposite direction to the U.S. currency, as it is often bought as a hedge against dollar weakness. A stronger U.S. currency also makes dollar-priced metals more expensive for holders of other currencies.

Later on Wednesday traders will be awaiting the reaction of oil to U.S. inventory data and eyeing the foreign exchange markets for clues as to the next move in gold.

They will also be watching the Fed which is due to publish its Beige Book on current economic conditions at 1800 GMT.

"In the case it was underlining Bernanke's statement that economic risks were fading, it could have a negative impact on gold in the evening," said Dresdner Kleinwort analyst Peter Fertig in a note.

Spot platinum meanwhile climbed to $2,012.50/2,032.50 an ounce against $1,991.50/2,011.50 late in New York on Tuesday.

The metal is supported by supply problems caused by the ongoing power shortage in South Africa, source of some 80 percent of world platinum output.

"Markets fear growing shortages in the coming months during the South African winter," said analyst John Meyer at Fairfax investment bank.

Among other precious metals, spot silver was little changed at $16.59/16.65 against $16.58/16.64 late in New York Tuesday, while palladium was trading at $425.50/433.50 against $421.00/429.00.

Reuters

Inflation fears may push gold back to $1,000/oz

LONDON - Gold is poised to climb back above $1,000 per ounce this year, as inflationary pressures and financial turmoil prompt investors to seek shelter in the metal used as a store of value.

But the caveat is gold's fortunes are traditionally strongly tied to the movement of the dollar and significant turnaround in the weak U.S. currency could limit its rally.

"There's a good chance that it may go back above $1,000 in the short- to medium-term," said Richard Davis, a London-based fund manager at BlackRock.

Record high oil prices, a soft dollar and turbulence in the banking sector sparked by the credit crunch pushed gold XAU to a record high of $1,030.80 per ounce on March 17.

Since then the metal has lost around 15 percent.

However inflationary pressures highlighted recently by the U.S. Federal Reserve and European Central Bank will aid gold.

"We're headed for inflationary times and gold has always been a safe asset to protect your wealth against inflation."

With oil prices at a record high above $135 per barrel and food prices surging to their peaks, fears of inflation is haunting investors more than ever.

U.S. Federal Reserve Chairman Ben Bernanke said on Monday the latest surge in energy prices is adding to the dangers from inflation but the central bank would strongly resist rising inflationary expectations.

His strong tone convinced more investors that rate hikes could come this year and triggered a rally in the dollar, which took the steam out of gold, as the two tend to move in opposite directions.

Some fund managers still betting on a weak dollar say there could be further fallouts from the credit crisis, which would make investors rush back to gold.

"We might have aftershocks or maybe another major 8.0 Richter scale kind of event lies ahead and that's the sort of thing that tends to make people nervous," said John Hathaway, senior managing director of Tocqueville Asset Management.

Hathaway said gold serves as an alternative financial asset particularly when markets worry about banking issues or currencies. "I think we will see gold going above those record high levels again and that will probably be this year."

Momentum

However, some analysts disagree, citing poor physical demand, weaker gold dehedging and possible strengthening of the dollar in the longer term.

"Anecdotal evidence in the current quarter so far suggests that the decline in demand has continued," said metals analyst Stephen Briggs at Societe Generale.

The Indian market, accounting for 20 percent of world demand, is likely to remain sluggish, Briggs said. "Gold at the moment just doesn't seem to have the momentum to do it."

"I'm sure $1,000 is possible but we need to be getting into new territory on the dollar and we're not," Briggs added. His comments were echoed by fellow analysts.

U.S. investment bank Goldman Sachs economists expect the dollar to remain weak, but they expect that over a 12-month period it will begin to strengthen as the U.S. economy recovers.

On the back of that, Goldman Sachs said it lowered its 3-, 6- and 12-month forward price forecasts for gold to $860, $840 and $800 an ounce respectively.

Record high oil prices, which boosted gold this year, could continue to offer support, as they higlight the dangers of inflation and put pressure on global economies.

"If (high) oil slows the economy to the point where we are in a low interest rate environment for the dollar, that could be good for gold," said Michael Lewis, global head of commodities at Deutsche Bank.