Capital Gold Group Report: Gold Prices Firm As Rising Oil Price Fuels Inflation Fears

LONDON (Thomson Financial) - Gold was higher in the early afternoon as oil rose back towards last week's record high, fueling buying of the precious metal as an inflation hedge and as the dollar languished after earlier touching a two-week low against the euro.

Rising fears over inflation have helped buoy gold prices in recent days, analysts said.

'Inflation hedging and safe haven buying is reemerging on both the surging oil price, inflationary pressures and with much of the economic data being very negative last week, especially the appalling consumer sentiment numbers which showed consumer confidence falling to their lowest levels since 1980, 28 years ago,' said analysts at Ireland's Gold Investments in a note.

Concerns about the ongoing health of the dollar, despite what many see as a short-lived bounce in recent weeks, are also helping sentiment towards gold, they added.

The currency hit a two-week low against the euro in the morning, although it has since recovered some ground. Weakness in the greenback supports buying of gold, which is typically seen as an alternative investment to the U.S. currency. 

At 2:14 p.m., spot gold was trading at $908.53 per ounce against $899.70 in late New York trade on Friday.

Among other precious metals, platinum prices reached an intraday high of $2,171 per ounce after Johnson Matthey released a report predicting prices will post a 'strong performance' this year, with 2007's market deficit seen continuing in 2008.

The white metal could reach a high of $2,500 an ounce this year, with a floor in prices seen at $1,775, the metals consultancy said.

The platinum market swung to a deficit of 480,000 ounces in 2007 from a surplus of 355,000 ounces the year before, Johnson Matthey said, as South African supply was cut by labor disruptions, accidents and equipment failures.

Overall supply fell by 4.1 pct last year to 6.55 million ounces, with South African supply down 4.9 pct, or 260,000 ounces, to 5.04 million ounces.

Investment demand hit 170,000 ounces last year, against disinvestment of 40,000 ounces in 2006. Investment buying was buoyed by the launch of two exchange-traded funds in London and Switzerland, which accounted for new demand of 195,000 ounces in 2007.

While prices initially edged higher on the news, with a positive report from Johnson Matthey already largely priced into the market earlier into the day, platinum prices later slipped back from highs to trade at $2,155 against $2,121 in late trade on Friday.

Meanwhile platinum's sister metal, palladium, eased to $442 per ounce against $446, while silver rose to trade at $17.04 per ounce from $16.92.