Gold Cuts Losses as Dollar Drops

Tuesday, November 25, 2008 5:21 PM

NEW YORK/LONDON -- Gold ended a hair lower Tuesday, recovering from earlier 2 percent losses, as the dollar slid for the third consecutive session against the euro after data showed that U.S. economy shrank more than expected in the third quarter.

However, inflationary pressure after the U.S. Federal Reserve unveiled massive plans to buy back mortgage debt should limit losses, analysts said.

The U.S. central bank announced a $600 billion program to buy mortgage-related debt and securities and a $200 billion facility to support consumer debt securities. Rates on U.S. 30-year mortgages posted a record drop of 1-1/8 percentage point to 4-7/8 percent on Tuesday.

"The Fed is trying to inject as much liquidity as possible, and we maybe in a very low interest rate environment in an extended period of time when inflation becomes a major concern," said Rob Kurzatkowski, futures analyst at optionsXpress.

Spot gold was at $817.20 at 2:50 p.m. EST (1950 GMT), down 0.3 percent from Monday's close of $819.55 an ounce in New York.

U.S. gold futures for December delivery settled down $1 at $818.50 an ounce on the COMEX division of the New York Mercantile Exchange.

Analysts were confident that with interest rates expected to fall in a number of key countries and the economic outlook uncertain, the precious metal will continue to be supported.

"All the easing that is going on at the moment in various parts of the world, with central banks pushing cheap funds into the market, is increasingly going to (affect gold)," said BNP Paribas analyst Michael Widmer.

The dollar fell against the single currency in early afternoon trade after the release of third-quarter U.S. GDP data which showed a larger than expected contraction in the U.S. after a sharp drop in consumer spending.

The commerce department revised the annual rate of decline in third-quarter U.S. gross domestic product to 0.5 percent from 0.3 percent previously forecast.

A weaker dollar boosts the precious metal's appeal as an alternative investment.

Firmer equities were also supporting gold, as selling of the precious metal to meet margin calls eases. U.S. stocks opened higher and European shares climbed after the Fed mortgage support plan.

But falling oil prices were capping gold's gains. U.S. crude futures slid more than 6 percent on Tuesday, undermining interest in commodities as an asset class.

Gold typically moves in line with crude prices, as it is often bought as a hedge against oil-led inflation.

OUTLOOK SUPPORTS

Among other precious metals, spot silver was at $10.27, down 1.9 percent from Monday's finish of $10.47.

Spot platinum fetched $859.00, 0.4 percent higher than Monday's late quote of $856, while its sister metal palladium fetched $191.00, up 0.3 percent from its previous close of $190.50.

All the platinum group metals have suffered from fears over falling demand from the automotive sector, which accounts for around half of global platinum and palladium consumption.

Rhodium, around 80 percent of which is used by the car industry, slipped below $1,000 an ounce for the first time since 2004 as investors fretted over demand.

Rhodium fell to $950 an ounce from $1,225 an ounce on Nov 20.

"Demand for rhodium is absolutely dominated by the auto industry - a quick glance at recent headlines and no-one should be the slightest bit surprised that the metal is trading below $1,000," said Mitsubishi precious metals strategist Tom Kendall.

"No-one should be surprised either if there is more downside to come," he added.

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