JAN HARVEY

Reuters

May 13, 2009 at 7:05 AM EDT

LONDON — Gold [GOLDC-I] rose to a five-week high in Europe on Wednesday as the U.S. dollar slid to its lowest in four months against a basket of currencies, denting the precious metal's appeal as an alternative asset.

Rising oil prices, which are currently holding just under Tuesday's six-month high just above $60 (U.S.) a barrel, are also boosting interest in gold as a hedge against inflation, analysts said.

Spot gold touched a peak of $928.30 an ounce, its firmest since April 2, and was bid at $926.70 an ounce at 0854 GMT, against $921.85 an ounce late in New York on Tuesday.

U.S. gold futures for June delivery on the COMEX division of the New York Mercantile Exchange rose $3.70 to $927.60 an ounce.

“The dollar does seem to be the driver here, that and oil rising above $60 a barrel,” said Robin Bhar, an analyst at investment bank Calyon.

He said the weaker dollar was prompting buying of gold as a hedge against rising inflation. “Higher energy prices will feed into those fears as well,” he added.

The dollar slipped to a four-month low against a basket of currencies and a seven-week trough versus the euro as a recovery in risk appetite curbed safe-haven buying.

Like all dollar-priced commodities, gold becomes cheaper for holders of other currencies as the U.S. unit weakens.

Its relationship with the dollar is particularly strong, however, as it is also often bought as an alternative asset to the currency and a hedge against rising prices.

Underlying demand for gold remains relatively lacklustre. Holdings of gold exchange-traded funds are stable, while dealers say bullion buying in India, the world's biggest gold consumer, is sluggish at higher prices.

Commodities such as oil and base metals as well as gold are rising, however, on the weaker dollar and hopes the economic downturn may be bottoming out.

This has boosted risk appetite across the markets, with European shares turning higher after a positive session in Asia.

“Investment in commodities is growing,” said broker MF Global in a note. “The rise in interest explains the ability of commodity markets such as gold and oil to remain relatively strong despite disappointing fundamental news.”

However, some doubts over the health of the global economy linger. News that China's industrial output rose less than expected offered another reminder that any recovery might not be as swift or as strong as investors may hope.

Silver prices tracked gold higher, reaching an 11-week high of $14.35 an ounce. Spot silver was bid at $14.26 an ounce against $14.19.

Among other precious metals, spot platinum was bid at $1,136 an ounce against $1,130, while spot palladium was bid at $234 an ounce against $232.50.

The autocatalyst materials suffered last year from a fall in demand, as the economic slowdown knocked car sales. Hopes the downturn may be bottoming out has taken some downward pressure off the market, though bad news is still emerging.

“Although we are bullish on the platinum group metals, a sustained rally may be difficult to achieve without a modest recovery in auto demand,” said HSBC in a note.

The question is how high will gold go>

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