Gold jumped 2 percent on Monday as buying picked up on a weaker dollar ahead of an expected cut in US interest rates and a rise in oil prices. Spot gold rose as high as $812.20 an ounce, the highest since November 28, and was quoted at $808.90/809.60 by 1515 GMT, against $794.90/795.70 late in New York on Friday, when it fell more than $8.
Gold has been stuck in a range in recent days ahead of the US Federal Reserve's rate decision on Tuesday, and some investors cautiously noted that data showing steady US job growth cooled expectations of a large cut in key interest rates.
"We have seen some short-covering here. The market expects that a rate cut is fairly possible and that may affect the dollar further. The overall sentiment is very positive for gold," MKS Finance analyst Frederic Panizzutti said.
"The dollar is a major factor. The expectation on tomorrow's rate decision is resulting in some positioning in the dollar and in gold, which is affecting both the markets differently - the dollar in a negative way and gold in a positive way."
The dollar slipped against most major currencies, reversing some recent strong gains. A cut in interest rate tends to lower the dollar's appeal as an attractive investment, with people switching to other assets, such as gold, for better returns. The metal is also generally seen as a hedge against oil-led inflation.
Oil prices rose more than one percent on expectations that a reduction in interest rates would revive economic growth in top oil consumer - the United States.
"Positioning ahead of tomorrow's Fed meeting could see gold trade up to the $805-$810 area, but there is a risk of another sharp sell-off after the expected rate cut," said Tom Kendall, metals strategist at Mitsubishi Corporation. "UBS news should help keep sentiment towards gold friendly, but is unlikely to have any major impact," he said after Swiss bank UBS unveiled $10 billion in shock subprime writedowns on Monday.
Gold is traditionally seen as a safe-haven asset. UBS said it had obtained an emergency capital injection from the Singapore government and an unnamed Middle East investor. The $10 billion charge was one of the largest writedowns by any global bank since the subprime crisis broke and was the latest sign of the devastation wrought upon some of the world's largest financial institutions from the credit crisis.
The Fed is seen cutting its target for overnight rates by at least a quarter-point to 4.25 percent this week, but interest rate futures have cut the implied chance of a half-point cut to about 25 percent from near 60 percent last week.
Friday's November payrolls data showed a 94,000 increase in employment and the jobless rate holding at 4.7 percent, suggesting the economy was not falling off a cliff. "We expect gold prices to remain relatively well supported over the coming week as the Fed announces a further 25 basis point reduction in the Fed funds rate," Michael Lewis, global head of commodities research at Deutsche Bank, said.
"However, US dollar strength in January remains a key risk in our view," he said in a market report. In other bullion markets, US gold futures rose after falling in New York on Friday. Most active February contract was trading up $14.9 at $815.10 an ounce.
The most active October 2008 contract on the Tokyo Commodity Exchange ended 10 yen per gram higher at 2,891 yen to track firm cash market. In market news, Turkey's gold imports rose 22.4 percent year-on-year to 220 tonnes in the first 11 months of the year, data from the Istanbul Gold Exchange showed.
Silver rose to $14.68/$14.73 from $14.33/14.38 an ounce, while platinum was at $1,464/1,468, against $1,455/1,460 an ounce in New York. Palladium fell to $343.00/347.00 from $345.50/348.50.
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