* Bullion hits highest level since March 26
* Dollar recovers after diving to five-month low
* Gold's Wednesday close above $935.50 may herald new gains
(Updates prices, adds detail)
By Jan Harvey
LONDON, May 21 (Reuters) - Gold was steady after hitting an
eight-week high in Europe on Thursday, as the dollar index
recovered from an earlier five-month low, reducing the appeal of
bullion as an alternative asset.
The metal was poised to make further gains from a technical
point of view after closing above $935.50 on Wednesday, analysts
said. However, it could be due for a brief period of correction
before making a fresh leg higher.
Spot gold <XAU=> hit a high of $943.40 an ounce and was at
$938.45 at 1507 GMT, against $937.10 late on Wednesday. It
breached $940 an ounce that session for the first time since
March, as dollar-related buying broke resistance around $933.
"Gold has really no life of its own," said Deutsche Bank
trader Michael Blumenroth, referring to the metal's recent
dependence on the dollar.
"The dollar is a bit stronger now and other commodities like
oil are all under pressure. I would expect some choppy trading
ahead," he said.
The U.S. dollar rose from its lowest level so far this year
on diminished investor risk appetite after Standard & Poor's
said it could downgrade Britain's triple-A credit rating due to
high debt. []
A softer dollar typically boosts gold, both because bullion
can be bought as an alternative to the U.S. currency and because
its weakness makes dollar-priced commodities cheaper for
non-U.S. buyers.
The two assets had given up their traditional relationship
as both reacted primarily to risk aversion. But as optimism
grows that the worst of the economic downturn is over, their
usual trading pattern returned.
"Though fundamentally, the dollar weakness story, fears of
future inflation and ongoing financial uncertainty could support
the metal, charts have now ticked into the overbought zones,"
said Pradeep Unni, senior analyst at Richcomm Global Services.
"This warns of an impending correction, (which) may attract
fresh buying."
PEAKS
Weakness on the global equity markets also helped gold, as
investors switched their attention to precious metals. European
shares fell on Thursday after the Fed cut U.S. growth forecasts,
while world stocks fell from six-month peaks. []
"While the metal is likely to run into further scaled-up
resistance, the fact equity markets appear to have stalled and
inflation fears are on the increase should give gold increased
upwards momentum," TheBullionDesk.com analyst James Moore said
in a note.
"A break of chart resistance around $946 could see the metal
push to the March high of $967.30," he added.
Analysts said on Tuesday a close above $935.50 an ounce that
session could prime gold for a further move higher, and perhaps
even an assault on February's highs above $1,000. []
Platinum <XPT=> was at $1,131.50 an ounce against $1,142
late in New York on Wednesday, while palladium <XPD=> was at
$228.50 against $232.50.
Fellow platinum group metal rhodium <RHOD-LON> rose another
$25 an ounce to $1,450 an ounce, and has climbed $125 or more
than 9 percent since Platinum Week began on Monday.
Silver <XAG=> was at $14.15 an ounce against $14.21.
Holdings of ETF Securities' London silver-backed exchange-traded
commodity <PHAG.L> rose by nearly 200,000 ounces on Wednesday,
and are up nearly 1.5 million ounces in the last fortnight.
[]
(Additional reporting by Humeyra Pamuk and Michael Taylor,
Editing by Anthony Barker)
