* World Gold Council says gold demand fell 9 pct in Q2
* Dollar pares gains after U.S. open, oil turns higher
* Silver slips to 3-week low as base metals slide
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By Jan Harvey
LONDON, Aug 19 (Reuters) - Gold prices turned higher in
Europe on Wednesday, reversing earlier losses as the dollar
pared gains against a basket of currencies, though fears about
underlying demand for the precious metal capped the upside.
Spot gold <XAU=> was bid at $939.00 an ounce at 1349 GMT,
against $937.30 an ounce late in New York on Tuesday. U.S. gold
futures for December delivery <GCZ9> on the COMEX division of
the New York Mercantile Exchange rose $1.20 to $940.40 an ounce.
The dollar rose on Wednesday after a sharp drop in Chinese
shares and sliding oil prices prompted investors to shy away
from currencies seen as higher risk, but later retreated from
its early highs as stocks pared losses. []
"For the rest of the month gold will be trading on sentiment
(and on) the dollar," said VTB Capital analyst Andrey
Kryuchenkov.
"I expect prices to recover well when we have full blown
inflation, as (gold is) an inflation hedge... but right now we
are still far off, we are still pretty much in deflation."
European shares fell in early trade after a sharp fall in
China's stock market. U.S. stocks declined at the open, though
they later lifted from lows. [] [] []
Crude prices turned higher after falling more than 1 percent
in earlier trade, lifting initial pressure on gold, which often
benefits from strength in oil as a precursor to inflation. []
Elsewhere the World Gold Council said gold demand fell 9
percent in the second quarter on persistant weakness in
jewellery buying, as the recession weighed on consumer sentiment
and high prices put off purchasers. []
But prices holding firm above $900 an ounce suggested areas
of demand not identified in the report -- from investors in the
COMEX futures market, for example -- firmly underpinned the
market, analysts said.
"The strong correlation between the gold price and the U.S.
dollar is pointing to these investors making up most of
unidentifiable demand," said Commerzbank analyst Eugen Weinberg.
Weinberg said while in the longer run he believed inflation
and dollar weakness would support gold buying, in the short term
he felt prices were vulnerable to a correction.
SILVER SLIDES
Fears over the economic outlook weighed on the more
industrial precious metals -- platinum, palladium and silver --
as well as the base metals market, where copper and aluminium
both fell more than 3 percent. []
Silver, which is widely used in electronics manufacturing,
slid more than 2 percent to a near three-week low of $13.48 an
ounce as base metals fell, pressured by losses in Asia. It later
recovered to $13.79 an ounce against $13.96 as gold firmed.
Silver's correlation with copper reached 0.98 this week --
with a correlation of 1 meaning prices have moved up precisely
together - while its correlation with gold is at 0.93, according
to Reuters data.
"Silver has had good selling since yesterday, as support for
the metal failed to materialise," said Standard Bank in a note.
"Copper has not made substantial gains since Monday, and this
has been putting downward pressure on silver."
Latin American silver producer Hochschild Mining <HOCM.L>
said its production rose to a record 13.9 ounces in the first
half of the year, and said it sees silver prices at $13-15 an
ounce for the rest of the year. []
Platinum <XPT=> was at $1,233.50 an ounce against $1,228,
while palladium <XPD=> was at $269 against $271.
(Reporting by Jan Harvey; Editing by Peter Blackburn)
