* Gold jumps as initial oil rally stirs inflation fears
* Equity weakness prompts safe haven buying
* Dollar strengthens after data, struggles to hold gains
(Updates with New York closing prices, market activity)
By Jan Harvey
LONDON, July 1 (Reuters) - Gold ended sharply higher after
surging to a 10-week high on Tuesday as rising oil prices
fueled buying of the precious metal as an inflation hedge.
Weak stock markets also increased gold's appeal as an
alternative investment, further buoying prices, traders said.
Gold <XAU=> was at $938.40/939.40 by New York's last quote
at 2:15 p.m. EDT (1815 GMT) from $925.95/927.15 in New York
late on Monday. It touched a session high of $945.80, its
strongest level since April 17.
"Oil is strong," said Commerzbank trader Michael Kempinski,
adding that inflation is a continuing worry.
"There has also been a bit of safe-haven buying as the
European stock markets have crashed," he added.
The U.S. gold contract for August delivery <GCQ8> on the
COMEX division of the New York Mercantile Exchange settled up
$16.20, or 1.8 percent, at $944.50 an ounce.
The August futures have now gained $73.30, or nearly 8
percent, from a session low of $875.20 on June 25.
Oil prices resumed their move higher, trading up more than
$3 a barrel at their session high on Tuesday after a report
from the International Energy Agency forecast oil supply would
remain tight. []
However, U.S. oil futures ended just 97 cents higher at
$140.97 a barrel.
High oil prices are fueling fears of inflation, against
which gold is often bought as a hedge. Strength in oil also
tends to stimulate interest in commodities as an asset class.
Equity market weakness is also fueling buying of gold as a
safe haven.
The FTSEEurofirst 300 index <> ended sharply lower,
while U.S. stocks retraced early losses in late trade as
better-than-expected auto sales improved momentum.
Meanwhile the dollar was steady against the euro for much
of the day, before strengthening after a report showed U.S.
manufacturing activity was stronger than expected in June.
[]
However, the U.S. currency has since given up those gains
and is trading lower against the euro.
Traders are also looking ahead to the European Central
Bank's upcoming decision on interest rates, due Thursday.
Speculation over interest rates on both sides of the Atlantic
has had a significant impact on gold.
"The outlook for prices increasingly relies on the U.S.
dollar, interest rates and perceptions about whether the FOMC
has the intestinal fortitude to lift rates in the
August/September window," said JP Morgan analyst Michael
Jansen.
"The market has recently cast more doubt about the Fed's
inflation fighting credentials following the release of the
FOMC statement last week, and this in turn has allowed the gold
price to move materially higher."
Investment bank UBS said on Monday it was raising its
average gold price forecast for 2008 to $895 an ounce, against
its previous forecast of $851, citing rising oil prices and the
sluggish recovery of the U.S. dollar.
It also upped its outlook for silver to $17.00 from $15.76,
for platinum to $2,010 from $1,853 and for palladium to $460
from $370. It raised its projected price of rhodium for the
full year to $9,413 from $7,794.
In fundamental news, the ECB said on Tuesday it completed
gold sales of 30 tonnes on June 30, and added that it had no
plans to sell more gold in this year of the agreement, which
runs until September. []
Among other precious metals, spot platinum <XPT=> was
little changed at $2,069.00/2,089.00 an ounce from
$2,060.00/2,080.00 late in New York on Monday.
The metal is benefiting from expectations a smelter
shutdown at major platinum producer Lonmin will affect supply.
Spot palladium <XPD=> was slightly lower at $464.00/472.00
an ounce against its Monday finish of $459.00/467.00, while
silver <XAG=> rose to $18.09/18.14 an ounce from $17.38/17.43
late in New York on Monday.
(Additional reporting by Frank Tang in New York; editing by
Jim Marshall)
