* Gold falls as oil weakens on big U.S. inventory build
* Bullion trims losses after Fed kept rates unchanged
* Russian gold output seen up 5.2 percent Jan-May period
(Recasts, updates with quotes, closing prices, market
activity, adds NEW YORK to dateline)
By Frank Tang and Jan Harvey
NEW YORK/LONDON, June 25 (Reuters) - Gold ended lower on
weaker crude oil Wednesday, but off its session lows as the
dollar extended losses after the Federal Reserve held rates
unchanged and did not signal a rate hike would be imminent.
The Fed held key U.S. interest rates steady at 2.0 percent,
and said that it expected inflation to moderate later this year
and next year, but the uncertainty about the inflation outlook
remained high due to rising energy and commodities.
"Although downside risks to growth remain, they appear to
have diminished somewhat, and the upside risks to inflation and
inflation expectations have increased," the Fed said in a
statement following a two-day policy meeting.
Gold <XAU=> was at $885.90/887.90 an ounce by New York's
last quote at 2:45 p.m. EDT (1845 GMT), down from
$888.70/889.70 an ounce late in New York on Tuesday.
"I don't think it (the Fed) was aggressive enough to
significantly alter the perception that existed prior to the
statement's release," said Bill O'Neill, managing partner of
LOGIC Advisors in Upper Saddle River, New Jersey.
"I think the Fed will still be reluctant to raise rates
because of the existing concern surrounding the financial and
liquidity crisis," O'Neill said.
The U.S. gold contract <GCQ8> for August delivery on COMEX
division of New York Mercantile Exchange settled down $9.30, or
1 percent, at $882.30 an ounce.
However, in after-hours electronic trade after the Fed's
announcement, August futures narrowed gains to trade down $3.30
at $888.30 an ounce.
OIL ENDS OFF LOWS
Prior to the Fed announcement, oil -- a key external driver
of gold -- dropped to below $132 a barrel after U.S. weekly
data showed U.S. crude inventory increased. U.S. crude futures
<CLc1> ended down $2.45 at $134.55 a barrel []
"I think the drop in oil is the most likely scenario for
the drop in gold, but it is wedged in a pretty tight range,"
said analyst Michael Jansen of JP Morgan.
Gold moves in the opposite direction of the dollar as it is
often bought as an alternative investment to the U.S. currency.
Dollar-priced gold also becomes cheaper for holders of other
currencies as the greenback softens.
"If people are ruling out any early increases in interest
rates, then you could see this as slightly negative for the
dollar, which would be positive for gold," said Daniel Smith,
an analyst at Standard Chartered.
The precious metal has benefited this week from a dip in
prices, which are down around $30 from a month ago.
A $25 price slide on Monday was met by good buying from
jewellers and institutional investors, with inflows into New
York's largest ETF rising 2 percent that day.
"Jewellery demand, although low, is reported to pick up
when prices fall to $880 an ounce, indicating a level of
support," said Fairfax analyst John Meyer.
In supply news, an industry body said it expected Russian
gold output to rise by 5.2 percent in the first five months of
2008 to 41.834 tonnes. []
Russia is the world's fifth largest supplier of mined gold
and its mine production has been falling for the last five
years, but producers said this year may see a turning point in
the trend.
The world's No. 4 gold miner, Gold Fields Limited <GFIJ.J>,
said its fourth-quarter output is likely to be 4.5 percent
higher than the previous quarter. []
Production at its South African operations is likely to be
up nearly 7 percent, it added.
Among other precious metals, silver <XAG=> edged down to
$16.70/16.78 from $16.64/16.70 late in New York on Tuesday.
Spot platinum <XPT=> was at $2,002.50/2,022.50 versus
$2,011/2,031 late in New York, while spot palladium <XPD=>
slipped to $459.00/467.00 an ounce from its previous U.S.
finish of $464.00/472.00 an ounce .
(Additional reporting by Raissa Kasolowsky in London; editing
by Jim Marshall)
