Gold drops on profit-taking after 28-year highs

NEW YORK/LONDON (Reuters) - Gold erased early gains to end lower in New York on Friday as investors locked in solid gains this week after prices surged to record highs on inflation fears and as the dollar slumped.

Yet overall market sentiment remained bullish, traders and analysts said.

Other precious metals also advanced, with silver rising to its highest level in more than three months, platinum hitting its highest since early May and palladium touching a five-week peak.

Spot gold rose as high as $739 an ounce, its highest since January 1980, also boosted by technical buying and short covering. It was quoted at $731.30/732.10 by 3:37 p.m. EDT, against $734.20/735.00 in New York late on Thursday.

Most-active December gold on the COMEX division of the New York Mercantile Exchange settled down $1 at $738.90 an ounce, dealing between $734 and $747.10 which marked the loftiest level since 1980.

Paul McLeod, vice president, precious metals at Commerzbank in New York, said that light book-squaring was seen after an extremely strong performance in gold this week.

"The key is seeing how the physical consumption, particularly India, adjusts to this price rise. As long as physical buyers don't step away from the marketplace, there is no reason why we don't see $800 this year," McLeod said.

On Friday, the dollar fell slightly against the euro after the greenback tumbled below $1.40 per euro for the first time on Thursday, weighed down by a hefty U.S. interest rate cut this week and expectations of more moves to come.

"We expect further advances into 2008 based on new lows in the U.S. dollar," Deutsche Bank said in a weekly report.

"This would, in our view, enable the gold price to move above $800/oz during next year. However, our internal forex flow data suggest the dollar may now be entering oversold territory and that the gold price is ripe for a short-term correction."

A weaker U.S. currency makes dollar-denominated metals cheaper for investors in other currencies, while gold is also seen as a hedge against oil-led inflation.

U.S. crude ended down 16 cents at just $81.62 a barrel as companies prepared to return workers to the offshore Gulf of Mexico after a storm triggered evacuations and production cuts earlier this week.

"There has been substantial safe-haven buying. The dollar has weakened to record lows and we have revised our forecast up for oil as well. On the top of that environment, there is anticipation of slower U.S. growth momentum and Fed rate easing," said Suki Cooper, analyst at Barclays Capital.

Gold spiked to a lifetime high of $850 in January 1980 as high inflation linked to strong oil prices, Soviet intervention in Afghanistan and the impact of the Iranian revolution prompted investors to buy the precious metal heavily.

A LOGICAL INVESTMENT

"If one is concerned about inflation arising as a result of excess credit, then gold is a logical investment because there is no credit risk attached to gold," Stephen Cohen, managing director at hedge fund firm Troika Dialog, said.

"There are a number of things moving in favor of gold, but certainly if people thought that central banks were taking a risk with inflation that would be good for gold," he said.

Growth in bullion exchange-traded funds (ETFs) continued as investors diversified their portfolios. Gold used to back StreetTRACKS Gold Shares <GLD.N> hit a record high of 577.10 metric tons on Wednesday. <XAUEXT-NYS-TT>

In other bullion markets, the most active gold futures contract for August 2008 delivery on the Tokyo Commodity Exchange hit a high of 2,747 yen per gram, its highest since August 1985, before ending 27 yen higher at 2,746 yen.

In other metals, platinum was last at $1,326.80/1,333.80 an ounce, against $1,323.40/1,330.40 late in New York on Thursday. Silver was at $13.49/13.54 an ounce, versus $13.36/13.41, and palladium eased to $335/339 from its previous finish of $336.40/340.40.

(Additional reporting by Anna Stablum in London)