Gold higher as dollar continues to languish

Gold was higher in early afternoon trade as the dollar continued to languish near an all-time low against the euro on mounting expectations that the US Federal Reserve will opt to cut borrowing costs by half a percentage point next week.

The outlook for the precious metal is good going into the fourth quarter, a period of peak demand for physical supplies of the metal due to the start of the festival season in India, analysts said.

'In the near term, market sentiment and in turn prices are likely to continue to find direction from the US dollar and the broader financial markets, while downside risk should be limited by the seasonally strong physical demand,' said analysts at Barclays (NYSE:BCS) Capital.

At 12.54 pm, spot gold was trading at 704.10 usd an ounce against 703.70 usd in late New York trade yesterday.

The dollar is expected to reach further historic lows if a cut in US interest rates is announced, as expected.

Most market participants had already priced in a quarter point reduction in the benchmark Fed funds rate, to 5.00 pct, to rein in the effects of the credit crunch on the wider US economy, but last week's disappointing jobs report for August raised the prospect that the Fed may be more aggressive on Sept 18.

As a result, all eyes will be on US Federal Reserve chairman Ben Bernanke when he addresses an audience in Berlin later today, especially after Frederic Mishkin, one of the Fed rate-setters, warned of downside risks from the market uncertainty.

Gold has been supported in recent days by safe haven buying as investors spooked by the volatility of the equity markets and the prospect of diminishing returns from interest-bearing investments such as currencies flocked to buy the precious metal.

Equities dipped dramatically during August after a spate of defaults in the sub-prime mortgage sector fuelled fears of a global credit crunch, and have since been volatile.

Meanwhile, the prospect of a Fed rate cut this year has weakened the dollar, along with other interest-bearing investments.

'The longer that credit woes dominate the financial markets, the more likely investors are to seek gold as a safe haven,' said HSBC analyst James Steel.

'After weakening in the initial stages of the credit crunch... the bullion market has traded consistently higher since mid-August. Gold's safe haven properties have been augmented, in our opinion, by the ongoing slide in the US dollar.

'If US economic data out this week follows along the path of last week's poor jobs data, the dollar may slide further and support gold prices in the process,' he said.

Among other metals, platinum weakened slightly on profit taking to 1,290 usd against 1,292 usd in late New York trade, while its sister metal palladium followed suit, dipping to 329 usd from 334 usd.

Silver was steady at 12.56 usd.