(Updates with quotes, prices)
By Anna Ringstrom and Atul Prakash
LONDON, March 17 (Reuters) - Gold pared gains on Monday, as
investors took profits from a rally to record highs above $1,030
and a sharp drop in oil prices lowered the metal's appeal as an
inflation-hedge.
Spot gold <XAU=> was quoted at $1,013.40/1,014.20 an ounce
at 1550 GMT after falling to a low of $998.90. Earlier, it hit a
record high of $1,030.80, against its close of $996.90/997.70 in
New York late on Friday.
Other key precious metals fell, with platinum declining more
than 4 percent to a 1-week low and palladium slipping over 6
percent in a broad-based sell off, analysts said.
"It looks as though there is just profit-taking after a
great run. There could be selling to meet margin calls as
equities tank," said David Thurtell, analyst at BNP Paribas.
European shares fell more than 4 percent to their day's lows
in afternoon trade, led lower by banks as investors worried
about contagion from a fire sale of Bear Stearns <BSC.N>.
JPMorgan Chase <JPM.N> said late on Sunday it would buy Bear
Stearns for just $2 a share -- more than 90 percent below its
price at Friday's close.
The deal underlined the risks banks are facing as the U.S.
mortgage crisis deepens and the rock-bottom price raised
questions over valuations across the industry. [].
"Oil clearly led the way down," said David Holmes, director
of metals sales at Dresdner Kleinwort Investment Bank.
"The market is incredibly jittery because of the financial
situation," he added.
Oil plunged from a record high as a part of wider commodity
sell-off sparked by growing concern over the health of the
world's largest economy.
Gold is seen as a hedge against oil-led inflation, while the
metal often moves in the opposite direction of the dollar.
The dollar pared losses after tumbling to record lows
against the euro earlier in the day, when liquidity-boosting
measures launched by the Federal Reserve over the weekend failed
to quell worry about the health of the U.S. financial sector.
MARKET GETS SUPPORT
But some analysts said gold was likely to get support from
the financial market concerns and a weaker dollar.
The dollar earlier reacted to the Fed taking emergency
measures to stem the fast-spreading financial crisis, cutting
its discount rate by 25 basis points to 3.25 percent on Sunday
and opening up discount window lending to major investment
banks, a tool not used since the Great Depression.
Investors expect the Fed could slash overnight rates by up
to 125 basis points by the end of its meeting on Tuesday.
An interest rate cut tends to weaken the dollar, which in
turn helps bullion prices.
"What is really important for this week is to see what the
Fed is doing," said Michael Widmer, analyst at Lehman Brothers,
saying financial jitters would underpin the market.
"The current macro-economic backdrop, particularly in the
United States, is bringing new buyers into the gold market."
Gold hit $850 an ounce in 1980, lifted by a combination of
high inflation linked to strong oil prices, the Soviet invasion
of Afghanistan and the impact of the Iranian revolution.
After adjusting for inflation, the 1980 high is equivalent
to $2,119.30 an ounce at 2007 prices. The average for the whole
of 1980 has been calculated at $1,532.14, according to precious
metals consultancy GFMS Ltd.
"The short term outlook for the metal remains highly
dependent on how the dollar and other markets perform. We expect
further volatility and weakness in risk assets in the near term
and do not rule out further strong gains in gold in the next few
days," UBS Investment Bank said in a market report.
In other metals, silver <XAG=> set a 27-year high at $21.24
before slipping to $19.92. It was last quoted at $20.65/20.70 an
ounce, against $20.63/20.68 in New York.
Platinum <XPT=> fell over 4 percent to $1,975 an ounce
before rising to $2,010/2,020, against $2,070/2,080 on Friday.
Palladium <XPD=> declined to $483/488 an ounce from $509/514.
(Editing by Peter Blackburn)
