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.