Gold rallies on softer dollar, bargain hunting

LONDON, Dec 18 (Reuters) Gold bounced on Monday on support from currencies and crude oil prices and as bargain hunters returned to the bullion market, but traders were wary of fund selling ahead of the year-end.

Spot gold was quoted at $617.00/8.50 an ounce by 1115 GMT from $615.00/616.50 late in New York on Friday, when it hit $614.20, the lowest since November 8. The metal has lost more than $35 since December 1.

''The dollar is a little softer and oil prices are holding above $63 (a barrel),'' a trader said. ''Fundamental buying kicked in at $615 ... It's not huge by any stretch of the imagination but probably enough to keep it above $615.'' Friday's sell-off came as the dollar strengthened after U.S.

industrial production data encouraged the market to think the U.S. economy might be heading for a softer landing than many economists were expecting.

Gold denominated in dollars becomes less attractive to holders of other currencies as the U.S. currency rises. A weaker dollar is often the result of economic and political uncertainty, for which gold is a safe haven.

The metal is also used as an inflation hedge and so follows rises by crude oil prices.

U.S. producer prices, housing data and gross domestic product growth figures later this week are likely to create further volatility in precious metals markets, analysts said.

FUNDS STILL LONG But they think low volumes ahead of the end-year holiday might exaggerate any price moves over the next couple of weeks.

''However with dollar sentiment improving and fund players still positioned long ahead of year-end ... the market remains at most risk to further long liquidation,'' HSBC said in a note.

Data from the U.S. Commodities Futures Trading Commission showed net long gold futures positions on the New York Mercantile Exchange fell 2 percent to 81,829 lots in the week to December 12 from 83,639 lots in the previous week.

However, speculative long silver positions jumped 5 percent to 43,604 contracts from 41,660 the previous week.

Silver was stronger at $12.90/97 an ounce from $12.85/12.92 late in New York on Friday, when it fell to $12.77, the lowest since November 21. Silver's peak on Friday was $13.82.

Analysts think it may be a while before silver sees $13 again, even if volatility does push precious metals prices up.

Should a recovering dollar set off an an avalanche of silver sales, the price in the worst case would be $12.40, a research note from Germany's Heraeus said.

But calling a move down to $12.40 might be short sighted as investors were continuing to pile into the white precious metals, Heraeus said.

The silver exchange traded commodity fund (ETF) is a good example of investor interest in silver.

''In the last 24 hours alone almost 50 tons of the metal were sold to to ETF buyers, resulting in a total off-take of nearly 3,500 tonnes,'' Heraeus said.

Platinum hit a low of $1,093 an ounce, its lowest in nearly seven weeks. It was last quoted at $1,099/104, below the $1,104/112 seen in New York on Friday.

Palladium eased to $321/326 an ounce from $326/329 in New York. Earlier it fell to a session trough of $320, the lowest since December 7.

REUTERS KR HT1747