Gold matches 2-month high, US dollar watched

SINGAPORE, Nov 10 (Reuters) Gold matched a two-month high around $635 an ounce on Friday due to a weaker dollar, but speculative buying driven by news that China plans to diversify its forex reserves was short lived.

Spot gold hit an intraday high of $635.50 an ounce before profit taking erased some of the gains, suggesting that dealers were not sure whether the diversification meant the central bank would boost its gold reserves.

''Frankly speaking, I haven't heard about this, but there's always a possibility that China will diversify its gold reserves,'' said a dealer at an investment bank in Singapore.

Silver hit a two-month high of $13.03 an ounce before slipping. It had risen more than four percent in New York to track gains in gold.

Gold was quoted at $633.60/634.60 late in New York on Thursday, when it had rallied nearly 3 percent and hit 635.50 as investors bought on high oil prices, a weak dollar and on speculation that China would buy gold for its foreign currency reserves.

China central bank governor Zhou Xiaochuan told Reuters on Thursday that China was considering many instruments to diversify its $1 trillion in foreign exchange reserves, without being specific.

China is the world's 10th-largest holder of gold, according to the World Gold Council, holding 600 tonnes.

Yukuji Sonoda, a precious metal analyst at Daichi Commodities in Tokyo, shrugged off speculation that China would buy gold, but said the metal was poised to test the highs again on the back of a weaker dollar.

''I don't believe it. This is only a speculation by some people. Somehow, people say such thing to support gold,'' said Sonoda, who expected the metal to rise to $700 by the end of this year.

''The same thing happens with platinum. Some people said ETF platinum would start, but this is the same story,'' said Sonoda, referring to last week's speculation which triggered a rally in the metal.

Platinum spiked to its highest since Sept. 11 at $1,213 last Friday on rumours of a launch of a platinum exchange-traded fund. But nothing has happened since and dealers started to question the likelihood of the launch.

There have been rumours China was planning to buy gold, but dealers said high and volatile prices may be the reason why the central bank was reluctant to diversify its holdings into gold to hedge against a decline in the dollar.

The dollar hovered near a two-month low against the euro after China's central bank said it had a clear plan to diversify its foreign exchange reserves. The euro firmed at $1.2860 after rising to $1.2849 on electronic trading platform EBS a day earlier. The dollar eased to 117.44 yen .

In Japan, most active gold futures on the Tokyo Commodity Exchange, currently October 2007, rose by its daily 60-yen limit a three-month high of to 2,430 yen per gram on short covering after the cash price rose sharply in New York.

''The general public is not buying much, but we have good demand from the electronics sector. That helps improve premiums,'' said a dealer at a bullion trading house in Tokyo.

Gold bars were on par with the London spot price in Tokyo, compared with a discount of 50 U.S. cents an ounce late last month .

Platinum rose to $1,206/1,211 an ounce from $1,202/1,208 an ounce in New York. Palladium eased to $334/339 an ounce from $335/340.

Silver was at $12.98/13.03 an ounce, versus $12.99/13.06 in New York.

REUTERS PKS