* Dollar surrenders some gains versus currency basket
* SPDR ETF sees outflow but physical demand expected on dip
* Platinum, palladium seen supported by firm fundamentals
(Updates prices)
By Jan Harvey
LONDON, Oct 20 (Reuters) - Gold prices rose back above
$1,340 an ounce in Europe on Wednesday, recovering some of the
previous session's hefty losses, as the dollar ceded ground to a
basket of currencies after its move higher.
Spot gold <XAU=> was bid at $1,342.10 an ounce at 1114 GMT,
against $1,336.00 late in New York on Tuesday, while U.S. gold
futures for December delivery <GCZ0> rose $6.50 an ounce to
$1,342.60. Spot prices hit a record $1,387.10 last week.
The precious metal fell 2.5 percent on Tuesday, its biggest
one-day loss since July 1, after China opted to raise its
benchmark interest rates by a quarter-point, sparking a rally in
the dollar.
But it has met with good buying since the correction. Market
watchers are still looking ahead to a Federal Reserve policy
meeting on Nov. 2, at which the bank is expected to discuss the
prospect of extending its quantitative easing programme.
"What we saw yesterday was more of a panic selling in
response to the surprise rate hike by China," said Richcomm
Global Services analyst Pradeep Unni. "Fundamentally however,
nothing has changed...and the weakness in the dollar persists."
"Markets are waiting for the quantity of quantitative easing
by the Fed," he added. "Bargain hunters are likely to... (use)
this dip as a buying opportunity. As long as gold holds above
the $1,329 mark, it's likely to recover to $1,351-$1357."
The dollar index, which measures the U.S. unit's performance
against a basket of currencies, eased 0.5 percent in early trade
as appetite for higher-yielding currencies stabilised after
China's surprise interest rate hike. []
Gold typically moves in a close inverse relationship with
the dollar, with strength in the U.S. unit curbing gold's appeal
as an alternative asset and making dollar-priced commodities
more expensive for holders of other currencies.
Tuesday also saw a further decline in holdings of the
world's largest gold-backed exchange-traded fund, New York's
SPDR Gold Trust <GLD>, which fell by nearly 1 tonne, its tenth
daily outflow in 16 sessions. []
PHYSICAL DEMAND EXPECTED
Gold's descent is expected to meet physical buying from
traditional bullion markets like India, the world's biggest
consumer of gold, however.
"It is in the trading sessions subsequent to an investor
stampede for the exit that physical demand becomes very
important," said Swiss bank UBS in a note.
"We would look for it to accelerate today. Early indicators
are quite positive with physical demand from Asia ex-India
initially in the low $1,330s helping to put a floor under gold
around that level."
Silver <XAG=> was at $23.71 an ounce against $23.32, having
also slipped by the most since July 1 on Tuesday with a 4.1
percent fall. It is still one of the biggest climbers of the
precious metals so far this year, up 41 percent.
Platinum <XPT=> was at $1,677.49 an ounce against $1,667.50,
while palladium <XPD=> was at $579.99 against $573.08.
The white metals also fell on Tuesday in gold's wake, but
analysts say their firm underlying fundamentals are expected to
lend support.
Demand for the autocatalyst metals is expected to improve
this year as the car industry continues its recovery, while mine
supply in South Africa is expected to be constrained.
"Demand (for platinum) from auto catalyst producers has been
rebounding this year," said Bank of America-Merrill Lynch in a
report. "We forecast a deficit for 2010 and 2011."
(Reporting by Jan Harvey; Editing by Keiron Henderson)
