Gold firmed more than 1 percent on Wednesday as the dollar slipped on growing expectations of further aggressive rate cuts by the US Federal Reserve and oil prices jumped, analysts said. Spot gold rose to a session high of $925.40 an ounce after falling to a low of $902.80. It was at $924.00/924.90 at 1448 GMT, against $913.10/913.90 in New York late on Tuesday.
"The metal continues to look to oil and dollar movements for short term direction," said Suki Cooper, precious metals analyst at Barclays Capital. "The overall environment remains positive for gold, given a raft of supportive external factors ranging from dollar weakness, anticipation of further Fed rate cuts as well inflationary concerns." The dollar fell against the euro and the yen on views the Fed could cut rates by a substantial 50 basis points this month amid worries of a possibly severe US economic downturn.
A weaker dollar makes dollar-denominated metals cheaper for holders of other currencies, but a slight recovery in recent days has made gold bulls wary of adding to their holdings. The metal is also traditionally seen as a hedge against inflation. Oil jumped to more than $111 a barrel, within sight of a record high, after a US government report showed a surprise drop in inventories in the world's top fuel consumer.
Precious metals constancy GFMS Ltd said gold prices were likely to bounce back above $1,100 an ounce this year after bottoming out in the high $800s. It said in a widely-tracked market report, Gold Survey 2008, that the factors supporting prices over the last few months would remain in place and investors would continue to look at bullion for strong returns.
Traders said volumes were low as the market looked ahead to central bank and Group of Seven meetings this week, which could offer clues to the future direction of currencies and bullion. "The Group of Seven meeting on Friday has a lot to do with the dollar. The big risk is that if they come out with some major rescue plan for the banking system, gold will fall quite sharply," said Matthew Turner, analyst at Virtual Metals.
The market also looked at central banks for near-term direction. The European Central Bank is expected to keep interest rates on hold, but the Bank of England could cut its key rate on Thursday. A rate cut by European central banks tends to help the dollar and is seen as negative for gold.
Some analysts said the market was expected to consolidate its position before marching higher again. Gold hit a record high of $1,030.80 an ounce on March 17 before falling to a two-month low of $872.90 last week in a broad commodities sell-off.
RBC Capital Markets said in a market report that investors should take profits ahead of the end of a Fed rate cutting cycle. "Gold is poised for a consolidation at lower levels before making another run at $1,000/oz later in 2008." The IMF is the world's third-largest gold holder after the United States and Germany, with 3,217.3 tonnes in reserves. It plans to sell 403.3 tonnes and use the profits to invest in government and corporate bonds, and possibly equities.
Spot platinum fell to $1,995/2,005 an ounce from $2,008/2,018 late in New York. Silver was at $17.16/18.21 an ounce, up from $17.64/17.69, while palladium rose $1 to $450/458 an ounce.