Capital Gold Group Report: Gold ends up on oil gains as dollar drops vs euro

By Frank Tang and Jan Harvey

NEW YORK/LONDON (Reuters) - Gold ended higher Wednesday as oil prices rose, boosting the precious metal's appeal as an inflation hedge, and as the dollar retreated from a six-month high against the euro.

Oil firmed more than $2 a barrel after data showed U.S. crude inventory fell and as fears grew that tropical storm Gustav could hit oil installations in the Gulf of Mexico.

Gold was at $826.05/827.45 by New York's last quote at 2:15 p.m. EDT (1815 GMT), up from $822.90/824.30 an ounce late in New York Tuesday.

"Gold is mainly supported by a firm crude price," said Philip Carlsson, Saxo Bank's global products manager for futures and options.

"I don't see the market as all bullish though, and should the tropical storm create fewer problems than expected, the sell-off could be immediate," he added.

Jon Nadler, senior analyst at Kitco Bullion Dealers in Montreal, said that gold buying remained sluggish, and short-term trades could dominate the market until after the U.S. Labor Day holiday next week.

U.S. gold contract for December delivery settled up $5.90 at $834.00 an ounce on the COMEX division of the New York Mercantile Exchange.

The dollar slipped as investors bet the U.S. currency's recent jump to 2008 highs against a basket of currencies was too far, too fast given hawkish rhetoric from a European Central Bank policy-maker.

A weaker dollar typically benefits gold, which is often bought as a hedge against weakness in the U.S. currency.

In the longer term, global economic deterioration is expected to support the dollar, as the Federal Reserve is likely to hold rates while other key central banks are expected to cut.

This should keep a lid on gains in gold, analysts said.

Resurgent physical demand for gold coins and bars, which was a key factor supporting gold prices above $800 an ounce, is still supportive, traders say.

Jewellery demand is also expected to pick up going into September, especially in India, the world's biggest jewellery market.

"Reports state that physical demand out of India is picking up ahead of the approaching festival season that peaks in October for Diwali," noted Marc Elliott, an analyst at Fairfax.

PLATINUM CLIMBS

Spot platinum, meanwhile, climbed 1.5 percent as traders took advantage of a recent drop in prices to buy into the white metal. Palladium also ticked up 2 percent.

Both metals have suffered from fears weaker economic growth will cut car consumption, denting demand for the platinum group metals as components in catalytic converters.

But after a sharp drop in prices throughout early August, both metals are now bouncing back.

Spot platinum ended higher at $1,434.50/1,454.50 an ounce, up from $1,409.50/1,429.50 late in New York. Spot palladium firmed to $288.50/296.50 an ounce, higher than its previous U.S. finish of $282.00/290.00.

"We believe that palladium is chronically cheap relative to platinum," said JP Morgan analyst Michael Jansen in a note.

"We actually believe that palladium should be bought on an outright basis in the $250-$275/oz area," he added.

Silver finished lower at $13.47/13.53 an ounce, ignoring gold's strength as traders locked in profits, compared with $13.56/13.64 an ounce late in New York late on Monday.