Gold slips, taking breather as dollar rebounds

By Frank Tang and Jan Harvey

NEW YORK/LONDON (Reuters) - Gold slipped on Friday as the market took a breather on the dollar's rebound the day after this week's sharp rally pushed gold to a record high above $1,060 an ounce.

On Thursday, Federal Reserve Chairman Ben Bernanke said the U.S. central bank must keep propping up the economy but cannot do so indefinitely for fear of triggering inflation. His comments dampened gold's appeal as an inflation hedge.

Peter Buchanan, commodities analyst at CIBC, said policy makers would not allow the dollar to keep falling.

"We believe that the dollar has overshot to the downside, with a relief rally expected in the next two to three quarters," he said.

Most-active December gold futures settled down $7.70 at $1,048.60 an ounce on the COMEX division of the New York Mercantile Exchange.

Spot gold was at $1,045.60 an ounce at 2:10 p.m. EDT (1810 GMT), against $1,054.00 late in New York on Thursday, a session that saw bullion hit a record $1,061.20.

Gold ended 5 percent higher for the week as dollar weakness pushed gold to a series of record highs. Investors bought the metal as an alternative to paper currencies, and a weaker dollar also makes gold cheaper for non-U.S. investors.

The Bernanke statement lifted the dollar index .DXY, off 14-month lows. The index measures the greenback's performance against a basket of six major currencies.

"Everybody is watching the dollar. It was weak in the last few days but it has clawed back a few losses today after Bernanke spoke yesterday, so that has capped gold for the moment," said Calyon metals analyst Robin Bhar.

Many expect persistent fears over currency market instability will push gold to further records this year as funds buy the metal as an alternative asset.

"It seems people are beginning to realize the real effect of quantitative easing -- not only the threat to inflation, but the threat to fiat currencies," said Nick Bullman, managing partner of hedge fund Bullman Investment Management.

"If you carry on just printing money, eventually people will start to look for another store of value."

WEAK PHYSICAL DEMAND

Physical demand for gold remained weak as high prices deterred jewelers, traditionally the main buyers of gold. Buying in India, the world's largest bullion market last year, has been lackluster despite the onset of the festival season.

Among other precious metals, silver also retreated from the 14-month high at $17.92 an ounce it hit on Thursday. Spot silver was at $17.70 an ounce against $17.72.