PRECIOUS-Gold hits 2-month high; inflation fears resurface

                                
 * ECB holds rates, BoE expands quantitative easing
                                
 * Stronger dollar limits bullion's rise
                                
 * Profit taking in platinum group metals
                                
 
                                
(Updates throughout)
                                
 By Jan Harvey and Catherine Bosley
                                
 LONDON, Aug 6 (Reuters) - Gold soared to two-month highs on
on Thursday, boosted by inflation worries that were stoked by
news Britain would pump more funds into the banking system than
expected, citing fragile financial conditions.
                                
 Gold, which is often seen as a hedge against rising prices,
rose to $971.25 an ounce, its highest since June 5, but a firmer
dollar, which makes commodities more expensive for holders of
other currencies, capped gains. [FRX/]
                                
 Spot gold <XAU=> was bid at $965.15 an ounce at 1526 GMT,
against $961.95 an ounce late in New York on Wednesday.
                                
 "People are starting to get worried about banks having
things too loose for too long," Citigroup analyst David Thurtell
said.
                                
 The Bank of England stunned markets by extending its
quantitative easing programme to 175 billion pounds ($297
billion) from 125 billion, beyond a previous limit of 150
billion pounds. [nL6430949]
                                
 But gold fell from its intra-day peak after the European
Central Bank said it expected price stability to be maintained.
[ID:nECBNEWS]
                                
 Commerzbank analyst Eugen Weinberg said both inflation
worries and technical factors were at play, and that a stronger
dollar would undercut bullion's rally.
                                
 "Should the dollar rally towards $1.42, $1.43 (versus the
euro) I could imagine gold would suffer," he said.
                                
 
                                
 OUTPUT RISES
                                
 In supply news, Gold Fields <GFIJ.L>, the world's number
four gold producer, said its output of the metal rose 4 percent
in the fourth quarter while production costs fell 6 percent to
$512 an ounce. [ID:nL684662]
                                
 On the demand side, buying of gold to back exchange-traded
funds remains slack, with holdings of the SPDR Gold Trust <GLD>,
the largest bullion ETF, unchanged for a fifth day on Wednesday.
                                
 Sales in the world's main gold jewellery market, India, were
also lacklustre as banks were shut by a strike. [ID:nBOM480828]
                                
 Among other precious metals, silver <XAG=> rose 0.8 percent
to $14.76 an ounce against $14.64.
                                
 The world's largest silver producer, Fresnillo <FRES.L>,
said its board had approved a pre-feasibility study for the
development of its Saucito project in Mexico, which could
produce up to 9 million ounces of silver a year.
                                
 This is equivalent to more than 1.3 percent of annual global
production, which stood at 680.9 million ounces last year.
                                
 Platinum <XPT=> dropped to $1,275 an ounce against
$1,282.50, while palladium <XPD=> was at $272.5 against $273.
                                
 Traders have taken profits in both metals after they hit
multi-month highs on Wednesday amid talk of a strike at South
African power company Eskom.
                                
 The union said on Thursday it will march to press state
utility Eskom for better wages, as the company braced for a
possible strike that could disrupt power in the world's biggest
platinum producer. [ID:nL6214056]
  (Editing by Sue Thomas)