London: Gold rose as bargain hunters entered the fray, but analysts said gains will be capped by a stronger dollar and receding inflation fears.
Spot gold was at $717.90/$718.80 an ounce at 1346 GMT (5.46pm UAE time) yesterday from $711.35 (Dh2,613) an ounce in New York late on Wednesday, when it slipped to $707.80 - its weakest since October 27.
Earlier, it touched $718.30 on physical buying interest, traders said.
The dollar retreated against the euro, but it is still up more than 20 per cent since hitting a record high above $1.60 in July.
"Gold will struggle in an environment where the dollar is strengthening," said Calyon analyst Robin Bhar.
"Safe-haven buying will continue to underpin the gold price, but it looks as if people are more inclined to move into US Treasury bonds and bills."
Any move by investors into US government bonds will boost the US currency, which, when it is rising, makes metals priced in dollars more expensive for holders of other currencies.
The dollar has been rising since August when markets realised the financial crisis and economic slowdown would not be confined to the US. "We are revising our gold forecasts lower on Goldman Sachs currency revisions as US dollar shifts are the dominant driver of gold prices," Goldman Sachs said in a note.
The dollar ceded some ground after data showed a rise in US weekly jobless gains.
"Should gold break through $700 an ounce we are concerned that the metal could continue to fall as ... investors may liquidate into an already weakening market," investment bank Fairfax said in a note.
Receding fears
Gold is also used by investors as a hedge against financial market turmoil and inflation, which erodes the value of money.
Worries about global recession, consumer belt-tightening and falling oil and industrial metals prices have all contributed to easing inflationary pressures and in fact markets are now talking about the likelihood of deflation.
Gold gained earlier this year as the credit market crunch stoked volatility across financial markets. But coordinated central bank action to pump money and cut interest rates is helping to ease the crisis.
