PRECIOUS-China rate surprise knocks 2 percent off gold

                                
 * China lifts benchmark 1-yr interest rates by quarter-point
                                
 * Prices still supported as traders await clues on QE
                                
 * Palladium seen as one of top picks among commods by UBS
                                
 
                                
 (Updates prices)
                                
 By Amanda Cooper and Jan Harvey
                                
 LONDON, Oct 19 (Reuters) - Gold was set for its largest
one-day fall since early July on Tuesday, wiping out all the
gains of the last week, as the dollar rose broadly after China
surprised markets with its first interest rate hike since 2007.
                                
 Adding to the impetus in the dollar was another round of
upbeat earnings from the U.S. banking sector. Bank of America
<BAC.N>, the largest U.S. bank, and Goldman Sachs <GS.N> both
beat expectations.
                                
 Spot gold <XAU=> fell as low as $1,332.00 an ounce before
recovering to $1,339.85 an ounce at 1535 GMT against $1,368.45
late in New York on Monday. U.S. gold futures for December
delivery <GCZ0> fell $31.40 an ounce to $1,340.80.
                                
 China's decision to raise its benchmark one-year interest
rate put perceived risk currencies including the euro <EUR=> and
the Australian dollar <AUD=> under pressure, while knocking the
commodities complex. [FRX/] [COM/WRAP]
                                
 "Clearly it is the move in the dollar that's having probably
the biggest near-term impact on the commodities complex and most
notably the precious metals," said RBS strategist Daniel Major.
                                
 "You've had negative real interest rates in China, but also
low rates across the board, so that precious metals and
commodities can compete with yielding assets ... The prospect of
higher rates in China or elsewhere clearly has got longer term
implications as gold can't compete once yields do return to more
traditional (levels)."
                                
 Bank of America became the third big U.S. bank to beat
earnings estimates in the third quarter. Goldman Sachs reported
a decline in profits yet still beat analysts' forecasts.
[ID:nN19106691] [ID:nN19113434]
                                
 The positive tone in bank earnings has helped soothe some
investor concern about the sector's exposure to volatile
financial markets and a low-rates environment.
                                
 
                                
 DOLLAR WEIGHS
                                
 Strength in the dollar usually weighs on gold, as it makes
dollar-priced commodities more expensive to non-U.S. buyers and
encourages investor flows into assets that, unlike gold, carry a
yield.
                                
 "Taken together with more exchange rate flexibility, (this)
could point to a stronger yuan over the medium term, which will
reduce the need for the dollar to fall against other currencies
as part of the process of rebalancing," said Matthew Turner, an
analyst at Mitsubishi Corp.
                                
 "Anything that alters the perceptions of where the dollar
and global monetary policy is headed is significant for gold at
the moment," he added.
                                
 Gold priced in euros <XAUEUR=R> and sterling <XAUGBP=R> also
fell after China's policy decision, by 1.1 percent and 0.9
percent respectively.
                                
 Spot gold prices hit record highs at $1,387.10 an ounce last
Thursday, driven by concern over the stability of the currency
markets and by expectations for further U.S. quantitative easing
which could undermine the dollar.
                                
 While they have since corrected, losses were likely to be
limited as investors looked ahead to a meeting of the Federal
Open Market Committee next month.
                                
 "Gold is not going to move much lower when you have the FOMC
ahead of us in early November, the G20 preparations later this
month and the full summit next month," said Credit Agricole
analyst Robin Bhar.
                                
 "These are all potentially friendly towards the gold market,
certainly the FOMC, where it is expected that they will embark
on further easing," he said. "We will see that perhaps pushing
the dollar lower."
                                
 In New York, the world's largest gold exchange-traded fund,
the SPDR Gold Trust <GLD> reported another small outflow of just
under 1 tonne from its bullion holdings on Monday. Its holdings
have declined for nine of the last 15 sessions. [GOL/SPDR]
                                
 Silver <XAG=> was at $23.74 an ounce against $24.35, on
course for its largest one-day fall for a week, while the
platinum group metals were more insulated against the broad
declines in the commodities sector. 
                                
 Platinum <XPT=> was at $1,671.75 against $1,690, and
palladium <XPD=> at $575.00 against $583.58.
                                
 Swiss bank UBS identified palladium on Tuesday as one of its
top picks among commodities. It forecast an average price for
the autocatalyst metal of $500 an ounce this year, rising to
$625 in 2011 and $700 in 2012. [ID:nLDE69I0KJ]
                                
 The metal has been one of the best-performing precious
metals this year, rising 44 percent.
 (Editing by William Hardy)