Gold futures climbed almost $8 an ounce Wednesday to close at their highest level in two months, finding support from strength in crude and some weakness in the U.S. dollar as traders awaited the Federal Reserve's decision on interest rates.
Gold for February delivery climbed $7.80 to close at $652 an ounce on the New York Mercantile Exchange.

Prices only slightly pared gains by the close, after trading as high as $655.50 during the session -- the contract's highest intraday level since Dec. 1.
February gold finished last month at $638 so it ended January with a gain of 2.2%.
Most of the trading volume has now moved to the April contract, which closed up 1.2%, or $7.70, at $657.90 an ounce. It's ended 2.1% above its Dec. 29 close.

"The market continues to march higher and ... the focus remains [on] $675/$676," said Peter Spina, chief investment strategist at GoldSeek.com.

"With oil nearing $60 again and a vulnerable U.S. dollar, we could be nearing another explosive leg higher," he said. "Until that time arrives, gold will be well supported on pullbacks."

A rise in oil prices helped lift gold on Tuesday, but dealers were cautious ahead of a Federal Reserve meeting that may determine the metal's price direction.

Spot gold rose as high as $645.80 an ounce and was quoted at $644.90/645.65 by 1516 GMT, against $642.60/643.60 late in New York on Monday.

"The market now appears to wait for the outcome of the two-day FOMC meeting starting today. Crude oil remains the dominant fundamental driver for the time being," Dresdner Kleinwort said, referring to the Federal Open Market Committee

Oil prices gained more than one percent, raising gold's allure as a hedge against oil-led inflation.

Investors await the release of key U.S. economic data, including fourth-quarter GDP figures and the Fed's rate decision on Wednesday, the Personal Consumption Expenditure inflation index on Thursday and January employment data on Friday.

"A low interest rate environment is very constructive for the market. So if the Fed is about to embark on rate cuts this year, that should be supportive for gold going forward," said Michael Lewis, head of commodities research at Deutsche Bank.

"Gold held relatively well in the face of the decline in the euro/dollar. There are some short-term risks to the downside, but by the end of the year, we are looking for gold to be trading higher," he added.

The dollar steadied before the meeting, the outcome of which investors will study for clues on whether the bank has become more optimistic on the economy after a raft of strong data.

Gold often moves in the opposite direction of the dollar.

GOLD'S OUTLOOK

Dealers remained confident about gold's long-term prospects.

"Despite a fairly neutral market balance, prospects for gold are buoyed by the combination of forecasts for dollar weakness and oil price strength," Barclays Capital said in a report.

It said fabrication gold demand had been stabilising after last year's sharp fall because of volatile and high prices, while bullion supply was unlikely to see major changes.

China, a major gold consumer, managed to maintain bullion consumption at around $240 tonnes last year as growing wealth offset higher prices, Albert Cheng, Far East managing director for the World Gold Council, said.

In other precious, silver rose to $13.31/13.38 an ounce from $13.14/13.21 late in New York.

Gold declined in Europe today after gaining overnight as a steady dollar against the euro and weaker oil prices triggered profit taking.

Dealers said gold would remain confined in a broad range as investors awaited the outcome of a meeting of the Federal Reserve and US economic data due for release this week.

Spot gold hit an intraday high of $647,70 an ounce in Asia before falling to $642,40/643,40 in early trade, compared with $645,00/646,00 in New York late on Friday.

Gold may gain for a fourth straight week as rising oil prices renewed the appeal of the precious metal as a hedge against inflation.

Twenty-two of the 42 traders, investors and analysts surveyed by Bloomberg News from Sydney to Chicago on Jan. 25 and Jan. 26 advised buying gold, which rose 2.3 percent last week to $650.70 an ounce in New York. Twelve respondents said to sell, and eight were neutral.

Gold touched a five-month high last week as oil jumped 6.6 percent, its biggest advance in two months. Demand for StreetTracks Gold Trust, an exchange-traded fund that is linked to the price of gold, has risen 45 percent in the past year. The fund has 146 million shares outstanding, each representing a 10th of an ounce of gold.

``The upward pressure on gold prices seems likely to stay in place,'' said Chris Yoo, manager at Samsung Futures Inc.'s global commodities team in Seoul. ``Investment demand for gold is continuing to rise on gold ETFs and demand for oil is also rising as prices are viewed as low,'' said Yoo, who expects gold to rise as high as $660 this week.

Gold rose $14.60 on the Comex division of the New York Mercantile Exchange last week, touching $661.20, the highest since Aug. 10. The gain was expected by the majority of analysts surveyed on Jan. 18 and Jan. 19. Respondents have forecast prices accurately in 87 of 144 weeks, or 60 percent of the time.

Inflation Hedge

Some investors buy gold to preserve purchasing power in times of accelerating inflation. Gold futures surged to $873 in 1980, when a jump in the cost of oil led to a 13 percent annual rise in U.S. consumer prices.

``Gold demand will stay firm due to buying interest by investors for an inflation hedge,'' said Kazuhiko Saito, chief analyst of Interes Capital Management in Tokyo.

Newmont Mining Corp., the world's second-biggest gold producer, raised its estimate of production costs three times last year, partly because of high-priced energy. The company July said it would spend $290 to $310 to mine an ounce of gold in 2006, up from an April estimate of $280 to $295 and a February forecast of $283. In 2005, the average was $236.

``We will see cost increases'' this year, Chief Executive Officer Wayne Murdy said Jan. 26 at the World Economic Forum in Davos, Switzerland. ``We have seen our energy costs go up dramatically over the last several years.''

Precious metals hit their strongest levels of the year Thursday, although gold eventually gave back all of its gains due to a turn lower in crude oil and a rise in Treasury yields.

February gold settled a dime lower at $648.10 a troy ounce on the New York Mercantile Exchange. March silver rose 21.7 cents to $13.49.

Fund buying occurred in both metals, reported Michael Gross, broker and futures analyst with Liberty Trading.

February gold peaked at $654.80 in screen trading, its most muscular levels since Dec. 1. March silver peaked at $13.60, its strongest levels since Dec. 15.

From there, however, gold slid back late in the day.

April platinum settled up $14.90 at $1,188 an ounce. March palladium gained $6.30 to $355.45 an ounce. April platinum posted an electronic high of $1,190.10 that was its strongest level since Nov. 30. March palladium got as high as $356.85 in screen trading, its strongest level since Sept. 7.

The most active March copper contract rose 5.30 cents to settle at $2.6545 per pound. Nearby January gained 5.10 cents to $2.6395.

Gold Fields Ltd the world's fourth-biggest gold producer, launched a $1.2 billion share placement on Thursday and liquidated hedge positions, overshadowing a worse-than-expected slide in profit.

Analysts welcomed the capital raising as removing uncertainty and said a dip in the share price was expected due to speculative activity.

Shares in the South African firm fell 2.14 percent to 123.30 rand by 1205 GMT, underperforming a virtually flat gold mining index.

"All in all, this whole restructuring is positive and the market should welcome it," said fund manager Stephen Roelofse at Sanlam Investment Management in Cape Town.

Gold Fields' shares have been pressured as the market speculated about how the firm would raise funds to pay for its $2.5 billion purchase of South Africa's South Deep mine, which has the world's largest gold deposit.

"There's still this expecation of a share overhang coming from AngloGold, but by next Tuesday it will be out of the way for Gold Fields," Roelofse added, referring to the end of the book-building period.

Mining group Anglo American Plc has said it plans to dispose of its 41.8 percent stake in AngloGold Ashanti Ltd, possibly over the next two years, but has not given details.

Another analyst said Gold Fields' share placement would dilute shares in issue by around 12 percent, based on current share prices.

Speculators such as hedge funds were selling the shares, hoping to buy them back at a lower price as the large amount of shares go onto the market, he added.

"We're going to be left now, post the capital raising, with a very simple financial structure and also an optimal state of our balance sheet," Chief Executive Ian Cockerill told a presentation.

PROFIT FALLS

Gold Fields posted a 24 percent fall in second-quarter adjusted profit, worse than analysts' expectations, as amortisation and other costs rose and interest income fell.

Earnings per share for the three months to end December, excluding the effects of financial instruments and foreign debt, fell to 108 South African cents from 142 cents the previous quarter.

The firm had been expected to post an 8.3 percent fall in EPS to 130 cents, according to the average forecast of 10 analysts polled by Reuters. The forecasts ranged from 108 cents to 148 cents.

Gold Fields said quarterly output rose by 10,000 ounces to 1.015 million ounces while total cash costs increased 4.8 percent to 83,707 rand per kg.

Investors also welcomed news that Gold Fields spent $528 million to close out the 1 million ounce hedgebook of Western Areas, which it bought for its stake in South Deep.

Gold Fields and the bulk of its shareholders have long been opposed to the practice of hedging or selling gold in advance at fixed prices.

"There was a lot of uncertainty with the hedgebook. It's now behind them and they can concentrate on operating the mine," Roelofse said.

Pricing of the $1.2 billion private placement to institutional investors was due to be announced by January 30.

JP Morgan and Citigroup will act as joint global cooordinators and bookrunners for the capital raising. They have been granted a 15 percent over-allotment option.

Gold Fields will use the funds to pay back a loan taken when it bought the 50 percent stake in South Deep held by Canada's Barrick Gold Corp and acquired the other half owner, Western Areas.

Gold slipped nearly one percent in late European business on Wednesday after climbing closer to a seven-week high, as a rise in the dollar and weaker oil prices prompted investors to take profits.

But sentiment remained positive and dealers said the metal had potential to breach a key level at $650 an ounce in the coming days, which might lift prices of other precious metals to new highs.

Platinum rose to its highest in two months before falling, silver eased after a six-week high and palladium matched Tuesday's peak of $348, its highest in four months.

"The sentiment in the market is still very positive and physical gold activity should be sound below $640. There is great potential to try again to break the $650 level," Frederic Panizzutti, precious metals analyst at MKS Finance, said.

"We are trading in a wide range of $630-$650. The market around these levels are pretty unstable but we believe that we are in a bull trend."

Spot gold hit a high of $647.10 an ounce before declining as low as $640.50. It was quoted at $641.30/642.30 by 1427 GMT, against $646.00/647.00 in New York late on Tuesday, when it rose touched $647.50 -- the highest since Dec 5.

Gold climbed on Tuesday to trade below a three-week high, as a drop in the dollar and firmer oil prices encouraged investors to build fresh positions.

But the metal, which has climbed about six percent in the past three weeks, was expected to face technical resistance at around $645 an ounce, prompting some people to take profits.

Gold hit a high of $637.50 ounce before easing to $636.90/637.90 by 1113 GMT, up from $632.60/633.60 in New York late on Monday, when prices rose as high as $639.60 -- the highest since Jan. 3.

old in Asia climbed to the highest since Jan. 3 on speculation that energy costs will remain high enough to spur demand for bullion as a hedge against inflation.

Gold usually moves in the same direction as oil, which rose for the second day today since trading under $50 a barrel on Jan. 18. Oil prices still have more than doubled from five years ago. Gold reached a 26-year high in May as oil rose to a record in July.

``Gold's strength is mainly related to the oil market,'' said Chris Kwon, broker at HanMag Refco Futures Corp. in Seoul.

Gold for immediate delivery rose as much as $1.20, or 0.2 percent, to $636.60 an ounce. It traded at $635.80 at 10:38 a.m. Mumbai time.

Some investors buy gold when energy costs climb. Gold futures reached a record $873 an ounce in January 1980 after oil costs doubled in a year, sparking a surge in the inflation rate.

Gold futures climbed as much as 1% Friday and the benchmark contract was poised for a gain of more than $7 an ounce for the week as the precious metal took its cue from higher energy prices.

Gold for February delivery was last up $6.30 at $634.40 an ounce on the New York Mercantile Exchange. It closed at $626.90 a week ago.

"The gold price is rallying higher with energy," said Peter Spina, chief investment strategist at GoldSeek.com.

Also, Federal Reserve Chairman Ben Bernanke "brought some focus back to the deficit problems the United States is facing, and this is giving investors some renewed interest in the metal," he said.
From here, "gold still is expected to face some difficulty extending these gains much further under these circumstances, but there is some good support just below," he said.

"A range has developed here and it will take a breakdown in oil below $50 to bring gold back down to the low $600s or another rally in the U.S. dollar to keep gold from moving back to $650, where it faces some stiff resistance," he said.
On Thursday, gold prices fell back from a two-week high to close down more than $5, pressured by a sharp sell-off in the energy pits.

Gold futures headed higher for a second session Thursday, topping the $635-an-ounce level for the first time in two weeks and supported by an upbeat outlook for the metal's price as well as news that India approved the launch of gold exchange-traded funds.

Gold for February delivery was last up $3.70 at $637 an ounce on the New York Mercantile Exchange after reaching a high of $637.20, the contract's strongest intraday level since Jan. 3.

On Wednesday, the contract rallied more than $7 an ounce to close at a more than two-week high, finding support in firmer oil prices and a weak dollar.

"Hints that inflation is still a threat to the U.S. economy triggered a recovery in gold and silver yesterday, with technical buying adding additional momentum," said James Moore, an analyst at London-based TheBullionDesk.com, in a morning note.
Looking ahead, gold's price should head higher in coming months and aim for the $670s in the first half, precious-metals consultant GFMS said Thursday. The firm said, however, that gold might not be able to exceed its recent record above $725 unless the situation in the Middle East worsens.

Gold fell in New York as a decline in energy costs reduced the appeal of the precious metal as a hedge against inflation.

Gold sometimes moves in tandem with crude-oil prices, which have dropped 17 percent this month. Gold is down 2 percent in January after climbing 23 percent in 2006.

``The crude keeps heading lower, and that's keeping pressure on the downside for gold,'' said Nick Ruggiero, a trader at Eagle Futures Inc. in New York.

Gold futures for February delivery declined $1, or 0.2 percent, to $625.90 an ounce on the Comex division of the New York Mercantile Exchange. Prices rose 3.3 percent last week.

A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date.

Some investors buy gold when energy expenses climb. Gold reached a 26-year high of $732 an ounce in May. Oil climbed to a record $78.40 a barrel in July. Crude fell below $51 today after Saudi Arabia's oil minister rejected calls for further cuts in production.

Gold prices gained on Friday on a recovery in oil prices and physical buying, but analysts said the market would struggle to break out of its current trading range in the near term.

But they remained positive about gold's outlook for the year.

"The market is looking pretty stable. It's moving in a range," said Costanza Jacazio, precious metals analyst at Barclays Capital in London.

""For the year, we would expect prices to benefit from a weakening of the dollar going towards the second half of the year as the macro-economic environment looks positive for gold."

On a fundamental basis, gold should also get support from the physical side, with fabrication demand seen stabilising, she said.

Spot gold was quoted at $613.80/614.80 an ounce by 1107 GMT after trading in a range of $609.80-$614.10, compared with $611.30/612.30 in New York late on Thursday.

Dealers said the market would be guided by movements in the currency and oil markets.

The euro steadied near earlier 1-1/2-month lows against the dollar, a day after the European Central Bank chief Jean-Claude Trichet signalled that the next rate rise would come in March rather than February.

Gold prices often fall with a rise in the dollar as the metal becomes expensive for holders of other currencies. The metal is also seen as a hedge against oil-led inflation.

Oil bounced back from a 19-month low below $52 a barrel after a 15 percent slide in the first 11 days of the year on weak demand for heating oil and fund selling.

"The market has formed a reasonable base around the $610 level and the should trade higher," a Singapore-based metals trader said.

Dealers said gold's ability to remain relatively stable despite a slump in oil price and a rise in the dollar might boost sentiment.

Investors are awaiting the December U.S. retail sales report at 1330 GMT for clues to the strength of the U.S. economy and the dollar outlook.

In other metals, platinum rose to $1,137/1,142 an ounce from $1,130/1,135 in New York, while silver was at $12.40/12.50, versus $12.32/12.39.

Gold bounced on Thursday after losing around $2 in New York on a firm dollar and weaker oil prices, and dealers said it was likely to remain volatile in step with other commodities markets.

Spot gold was quoted at $612.60/613.60 per ounce at 1046 GMT, up from its New York close of $610.80/611.80, after trading in a range of $608.70-613.20.

The metal started 2007 around $640 and lost nearly $40 on dollar strength before bargain-hunters started picking it up.

"Physical and technical buying has again provided good support, with the recovery in the base metals improving gold's outlook," said James Moore, analyst at TheBullionDesk.com.

"However, the potent combination of oil weakness/dollar strength could still trigger long liquidation, pressuring gold back to the $585 region," he said.

Technical signals were mixed, chart-readers at Barclays Cpaital said, but there was more chance of a negative move than a positive one despite the recent corrective rally.

"Having failed to make headway above 614 the way is clear for another run at 600 and possibly an overshoot," it said in a note.

The dollar hit a 13-month high against the yen on Thursday, though it slipped from six-week highs against the euro as investors waited for clues from European Central Bank President Jean-Claude Trichet on whether interest rates could rise further in February.

Gold fell more than one percent in Europe on Wednesday as the dollar gained after the release of U.S. trade data, but the long-term outlook for higher prices remained intact, dealers said.

Spot gold dropped as low as $605.70 an ounce before rising to $608.80/609.50 by 1541 GMT, against $612.80/613.80 in New York late on Tuesday.

"The strength in the dollar in the last couple of days has prompted some long liquidation, but we would expect the dollar to weaken further again and act as a catalyst for gold to move back higher," said Frederic Panizzutti, analyst at MKS Finance.

"We are clearly positive for the first half of the year on expectations that the dollar has more downside potential on the back of easing monetary policy in the United States in a context of an extending trade deficit."

The dollar rose for the second day against a basket of major currencies after data showed the U.S. trade gap shrank in November to its narrowest in 16 months.

Gold often moves in the opposite direction to the dollar and is generally seen as a hedge against oil-led inflation.

Oil fell more then $1 back below $55 a barrel, threatening a repeat of the previous session's rout that took prices to a 19-month low.

"Much of the bullishness that fixates on gold derives from pent-up frustration at years of record low prices, and this is still working itself through and might further to go, but much depends on the dollar," said a report, prepared by London-based Virtual Metals for financial services provider Fortis.

OUTLOOK

Barclays Capital lifted its gold price forecast for 2007 on expectations of a significant depreciation in the dollar over the second half of the year and a recovery in oil prices.

It saw the average gold price at $620 in the first quarter of the current year and at $640, $650 and $670 in subsequent quarters.

But UBS Investment Bank lowered its prediction for gold to $625 in a month from now against its earlier forecast of $660 and to $650 in three months versus a previous prediction of $690.

"Gold's ability to hold above $600 over the past couple of days has improved the metals technical outlook, with the metal now in the process of establishing a base at $605," said James Moore, analyst at TheBullionDesk.com.

"Sentiment is likely to remain extremely volatile short term ... however longer-term sentiment remains firmly bullish with the current dip potentially offering investors an entry point."

Dealers said purchases by jewellers in Asia in the past two days helped gold stay above $600 but the metal would be under pressure because of a strong dollar.

In other metals, platinum jumped to a one-month high of $1,146 an ounce before easing to $1,138/1,144, compared with $1,123/1,128 in the U.S. market.

Silver fell to $12.27/12.34 from $12.45/12.52 an ounce, while palladium was down $1 at $325/330.

Gold for February delivery was last up $1.80 at $611.20 an ounce. The contract closed higher in New York Mercantile Exchange action on Monday, after losing about 5% of its value last week, when it was swept up in a broad wave of selling in the commodities sector.

"The gold market took a hammering last week, primarily on U.S. fund selling, which appeared after the Asian and European hours of business on Friday," said Julian Phillips, an analyst at GoldForecaster.com.

"But in Asian and European hours the gold price started to bob back like a cork released under water," he said in e-mailed commentary.

"Demand from physical and investment sources will continue to do this while the funds are following the dollar and oil prices," he said, adding: "watch out for a change of direction by the funds."

Gold moved higher on Monday after plunging to two-month lows in the previous session on a dollar rally, with the metal getting support from physical buyers and bargain hunters, analysts said.

But gold remained under pressure because of falling prices of base metals, they said.

"There is relatively strong support at $600 an ounce, but if you have got a sell-off of base metals across the board, then it would be relatively difficult for gold to be isolated from that," said Michael Widmer, metals analyst at Calyon Corporate and Investment Bank.

"Overall, I would still say that there are more indicators for a weakness in the dollar and that should support gold prices going forward. For the rest of this year, the macro-economic picture would be probably weaker rather than stronger," he said.

Spot gold was quoted at $608.40/609.40 an ounce by 1107 GMT, compared with $606.70/607.70 in New York on Friday, when it fell as low as $601.70 after the dollar surged.

Bullion investors were cautious because of a fall in base metals, with copper extending losses and putting other metals under pressure. [ID:nL08890893]

The dollar steadied near six-week peaks versus the euro, keeping gains made in the wake of surprisingly strong U.S. jobs and manufacturing data.

Gold often moves in the opposite direction of the dollar and is seen as a hedge against oil-led inflation.

"At these lower levels, physical demand is expected to provide some form of support, at least in front of the psychological level of $600 and again at $590," Standard Bank said in a daily report.

James Moore, metals analyst at TheBullionDesk.com, said Friday's sell-off in gold appeared a little excessive and lower prices might generate technical as well as physical buying.

But Wolfgang Wrzesniok-Rossbach, head of precious metals marketing at Germany's Heraeus, was not that positive.

"With many traders and investors being caught on the wrong foot in both markets, it seems however doubtful that they are able to provide the necessary short term support that is needed to stabilise the gold price right now," he said.

In other precious metals, silver was last quoted at $12.12/12.19 an ounce after falling to a new two-month low of $12.00, versus $12.18/12.25 in the U.S. market.

Platinum prices rose to $1,111/1,116 an ounce from $1,105/1,110, but palladium dropped to $326/331 an ounce from $331/336 in New York.

Gold for February delivery was last down $17.20 at $609 an ounce on the New York Mercantile Exchange after touching $608, the contract's lowest level since late October.

The contract has lost a total of almost $12 in the past two sessions, hurt by unexpected strength in the dollar, worry about an economic slowdown and recent weakness in energy futures.

On Friday, the dollar was higher against the euro, British pound and yen after the Labor Department said the economy added 167,000 jobs in December, while the jobless rate remained at 4.5%

Gold fell to a one-week low on Thursday after hitting a one-month high the previous day, as a firmer dollar prompted investors to liquidate trading positions.

But the long-term outlook remained positive on expectations that the dollar would weaken because of concerns about U.S. economic growth, dealers said.

"It's just a consolidation phase. I think we will see gold higher later in the year, but short-term sentiment is little damaged," a European precious metals trader said.

The release of key U.S. economic data this week might provide cues about the dollar outlook and set direction for the precious metals market, he said, adding that gold also was under pressure because of a sharp decline in base metals prices.

Spot gold fell as low as $624.20 an ounce and was quoted at $625.20/626.20 by 0957 GMT, down from $627.70/628.70 in New York late on Wednesday.

The dollar built on the previous day's gains versus major currencies, with investors looking to see if key data on jobs and the service sector matches a pick up in U.S. manufacturing.

Gold, which often moves in the opposite direction of the dollar, tumbled more than $12 in the U.S. market on Wednesday as the currency rallied after the Institute for Supply Management said its manufacturing index climbed.

The metal ended 2006 on a high note, rising 23 percent on an influx of funds diversifying their investments into markets with the potential for higher returns than stocks. It spiked to a 26-year high of $730 an ounce on May 12, 2006.

"There is a fair bit of key economic data in the U.S. over coming days, and that really is going to determine the fate of the greenback and where gold prices are likely to trend," Craig James, chief economist at Commonwealth Securities in Sydney, said.

The market awaited the release of the closely watched non-farm payrolls report on Friday. A weak reading would likely strengthen the view the U.S. Federal Reserve may start cutting interest rates in coming months to shore up a slowing economy.

"Falls in energy prices and other commodities, such as copper and other base metals, are worrying, but gold will continue to draw a lot of safe-haven demand with the situation in Iran unresolved and continuing tension in the Middle East," said Hisaaki Tasaka, a market analyst at Ace Koeki Co. Ltd.

Copper futures on the London Metal Exchange hovered near nine-month lows on worries about slowing demand for the metal. Other base metals also declined.

In other precious metals, silver fell to $12.47/12.54 an ounce from $12.58/12.65, while platinum slipped to $1,121/1,126 an ounce from $1,126/1,132. Palladium was unchanged at $334/339 an ounce.

Gold pared gains after hitting a one-month high in a choppy market on Wednesday as the dollar rose further following stronger-than-expected U.S. manufacturing data, dealers said.

Spot palladium rose to its highest in nearly four months, while platinum eased after climbing to one-month highs.

Gold fell as low as $632.80 an ounce before bouncing back to $644.90, its highest since Dec. 5. It was quoted at $641.30/642.30 by 1535 GMT, against Tuesday's close of $640.20/641.20 in London.

"Gold has started the year quite well. We expect the dollar to weaken a bit in the first quarter and I think that's positive for gold," said Matthew Turner, analyst at Virtual Metals.

"The trend might continue in the second quarter as well."

But the dollar extended gains after the Institute for Supply Management's reading on the factory sector beat expectations for December, following a surprise contraction in the previous month.

"Clearly the key influence remains the dollar," Stephen Briggs, economist at SG Corporate and Investment Banking, said.

A rise in the dollar makes gold costlier for holders of other currencies and often lowers bullion demand.

The market also awaited minutes from the U.S. Federal Reserve's policy meeting, due later on Wednesday, for clues to interest rates and the dollar outlook.

"Dollar movements will be closely watched in the coming sessions with the yellow metal still vulnerable short-term to profit taking after moving up on limited volumes over the Christmas period," TheBullionDesk.com said in a daily note.

CENTRAL BANK BUYING

The market also noted gold buying by a European central bank last month, a period which saw selling of the metal by other central banks in the region under an agreement that limits gold sales.

Dealers said any buying of gold by central banks was positive for the market.

The European Central Bank said in a statement last week that figures to the week ended Dec 22. reflected the selling of gold by one European central bank and "a net purchase by another Eurosystem central bank". It gave no further details.

Dealers said the market was expected to remain choppy in the coming days.

"Typically market liquidity only properly returns in the second week of January, and a new trading year brings fresh budgets for investors to act on underlying convictions," said Robin Bhar, analyst at UBS Investment Bank.

In other precious metals, palladium touched $340 an ounce, its highest since early September, and was last quoted at $338/344. It closed in London on Tuesday at $333/338.