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Gold wilts as dollar rallies

Tuesday, February 5, 2008

LONDON (Thomson Financial) - Gold dipped in late afternoon trade as the dollar rallied against the major currencies in the wake of poor European PMI data, shrugging off a large and unexpected drop in US services sector activity.

Gold has posted several days of losses as investors took profits after its recent sharp rally. At its high, gold was trading some 11 pct above its end-December level -- amid dollar weakness, turbulence in the equity markets and the threat of a US recession.

A bounce in the dollar today has added further pressure to gold prices. The precious metal typically benefits from a weaker dollar, as it is seen as an alternative investment to the greenback.

A decline in oil prices is also undermining sentiment towards gold. Stronger oil is seen as an early indicator of rising inflation, against which the precious metal is often bought as a hedge.

At 3.37 pm, spot gold was trading at 889.68 usd an ounce against 894.80 usd in late New York trade yesterday. On Friday it hit a record high of 936.60 usd.

"Gold prices probed much lower," said Kitco Bullion Dealers analyst Jon Nadler. "As if heeding yesterday's bullish forecasts, the US dollar surged ahead and overcame the 76 mark on the index, while crude oil was seen dropping nearly one dollar to near 89 usd per barrel."

"The yellow metal is now poised to retrace its path to possibly the 850 usd area, although it could also encounter some buying if it reaches the 870 usd level," he added.

Platinum meanwhile was trading at 1,776 usd an ounce, against 1,795 usd an ounce yesterday. The metal hit an all-time high of 1,810 usd in overnight trade on supply outages in major producer South Africa, though profit-taking has since pushed it lower.

A number of major platinum producers were forced to close operations in South Africa after state electricity supplier Eskom asked them late last month to curtail their power consumption. Eskom said it could not guarantee electricity supply if usage was not cut.

"Although Eskom reinstated authority for mines to increase power loads from 80-90 pct, not all producers have been able to ramp up production to normal capacity and furthermore Eskom is unable to guarantee power supply," said analysts at Barclays Capital.

"We forecast platinum prices to average 1,700 usd an ounce in the first quarter of 2008, supported by a market that is set to remain in heavy deficit this year, exacerbated by the historically low levels of inventory."

South Africa is the source of around three-quarters of global output of the white metal.

Among other precious metals, palladium was trading at 408 usd against 425 usd, while silver was at 16.37 usd against 16.74 usd.

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