Gold firmed in Europe on Thursday, reversing earlier losses, as the dollar weakened against the euro, sparking buying of the metal as an alternative asset.

Spot gold was bid at $951.30 an ounce at 1148 GMT, against $948.10 an ounce late in New York on Wednesday (May 28).

'The correlation between the dollar and gold is pretty strong at the moment,' said Commerzbank analyst Carsten Fritsch.

He said in the short term the bank's currency analysts believe the dollar could bottom out and move higher, weighing on gold.

The euro firmed against the dollar on Thursday, reversing earlier losses that saw the single currency touch a one-week low of $1.3793 earlier in the session. The US currency strengthened, however, against the yen.

Gold has recently re-established its close negative correlation with the US currency after the relationship weakened earlier this year, as risk aversion took the driving seat in both the bullion and currency markets.

Weakness in equity markets is still helping gold hold above key support at $940 an ounce. Global stocks fell from 2009 highs as concerns grew rising US debt yields could push up borrowing costs and arrest a recovery.

Economists are becoming increasingly worried about the debt burden taken on by countries looking to spend their way out of recession.

'Even the all-mighty Fed cannot stop longer-term yields from rising,' said VTB Capital in a note. 'The deteriorating financial position of the US spurs quality concerns while the Fed printing press fuels inflation expectations.'

Inflation prospects

The prospect of rising inflation in the longer term is likely to support gold, a key hedge against rising prices.

Investor demand for the metal remains relatively soft after the heavy buying seen in early 2009. Holdings of the main gold exchange-traded fund, the SPDR Gold Trust, were unchanged, albeit near record levels, for a third straight session.

Holdings of a much smaller ETF operated by Swiss bank Julius Baer are expected to rise to a record 1.599 million ounces by Friday, however.

In India, the world's biggest bullion buyer, demand was firm despite high prices as the wedding season got underway. During the season, which lasts until June, parents give gold jewellery as a wedding gift for financial security.

Silver tracked gold higher as investors bought it as a cheaper proxy for the yellow metal, and was at $14.82 an ounce against $14.72.

Among other precious metals, platinum was quoted at $1,128 an ounce against $1,131.50 late in New York on Wednesday, while palladium was at $224.50 against $222.

Platinum is being pressured by fears over the demand outlook, especially from the ailing car sector, which typically consumes half of the world's annual output of the white metal.

General Motors failed to win approval for a crucial bond exchange proposal on Wednesday, bringing it one step closer to bankruptcy. EU ministers are meeting Friday to discuss the sale of GM unit Opel.

'GM seems set for bankruptcy and this is keeping investors cautious on platinum and palladium, hence the currently low platinum/gold ratio of 1.19,' said UBS analyst John Reade in a note.

'We are looking for a resolution of the GM crisis as a trigger to tactically buy platinum, either outright or against gold.' – Reuters