UPDATE 4-Gold gains in Europe but weaker oil weighs Mon Mar 31, 2008 11:16am BST (recasts, adds quotes, changes prices, pvs SINGAPORE) By Atul Prakash
LONDON, March 31 (Reuters) - Gold rose on Monday as bargain hunters took advantage of a price drop, but gains were likely to be capped by weaker oil prices that reduced the metal's appeal as a hedge against inflation.
Spot metal <XAU=> climbed to a high of $938.60 an ounce and was quoted at $936.40/937.20 at 1003 GMT, against $931.80/932.60 late in New York on Friday, when it dropped more than 2 percent on falling crude oil prices.
"Concerns about a slowing U.S. economy and the financial stability of major institutions continue to affect broader investor sentiment, with the precious metals benefiting from the uncertainty," said Tom Kendall, metals strategist at Mitsubishi.
"In this environment, gold should test the $950 level again sooner rather than later. But if the modest correction in oil becomes more pronounced, then that would tend to restrain gold in the short term," he said.
Oil fell to $105 a barrel, extending Friday's decline, after the restart of a crude pipeline system in Iraq eased fears of an extended disruption to exports from the oil-producing south.
Gold has lost more than 9 percent since spiking to an all-time high of $1,030.80 an ounce on March 17. Record high oil and expectations of further interest rate cuts in the United States had propelled bullion to the record high levels.
"With oil prices easing and the dollar finding a firmer footing, gold isn't probably able to surge higher as rapidly as it did in the first two months of this year," said Pradeep Unni, analyst at Vision Commodities.
"Although the long-term bull trend in gold remains in place, we believe that we are in a high volatile period. Short-term corrections are likely."
DOLLAR MOVES WATCHED
The dollar steadied but was stuck near an all-time low against the euro as investors awaited signals on the health of the U.S economy from data due later this week, including a jobs report on Friday.
U.S. employers are expected to have cut payrolls for a third straight month during March. The data may offer more clues on the state of the economy and the outlook for interest rates.
The dollar is down more than 8 percent on the quarter versus the euro, its worst performance in three years.
A weaker dollar makes gold cheaper for holders of other currencies and often lifts bullion demand.
Analysts said gold's fundamentals were intact amid supply constraints -- heightened recently by a power crisis that has disrupted mining in South Africa, the world's main platinum producer and the second-largest gold producer.
"Fundamentally, lower production out of South Africa and expected stronger demand out of India and China should see gold prices recover in the autumn, if not earlier," Fairfax investment bank said in a daily report.
U.S. gold futures for June delivery GCM8 rose $5.9 an ounce to $936.50, having fallen 1.83 percent on Friday.
In other metals, platinum <XPT=> rose to $2,027/2,037 an ounce from $2,000/2,010 on Friday, while silver <XAG=> firmed to $18.00/18.05 an ounce from $17.88/17.93. Spot palladium <XPD=> rose to $443/448 an ounce from $441/445. (Reporting by Atul Prakash; editing by Elizabeth Piper)
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