By Chikafumi Hodo
TOKYO (Reuters) - Gold fell nearly 1 percent on Friday as the dollar and equities rallied after U.S. officials scrambled to help mop up more of the toxic debt that has sunk markets and triggered a flight from risk.
Bullion initially rose in early trading on Friday after falling sharply from above $900 an ounce late the previous day, but the precious metal lost ground as traders adjusted positions ahead of the weekend after massive flight-to-quality buying boosted prices this week.
Wall Street had its best day in six-years on Thursday on news Washington was considering a more comprehensive solution to the mounting financial crisis. This spurred a furious late rally, sending gold tumbling from a peak above $900, its highest since August 4.
Spot gold was trading at $840.40 per ounce by 3;34 a.m. EDT, down $6.85 or 0.8 percent from Thursday's nominal New York close of $847.25.
"Gold is clearly overshooting so we are seeing some selling now, although the credit crisis is not over, so investors will continue to seek safety in gold," said a senior trader at a Japanese trading house.
Traders said investors from emerging markets, including Russia and India, have been selling U.S. Treasuries amid fears of more trouble for the U.S. financial sector and have been using the proceeds from Treasuries to buy gold.
This week, U.S. authorities bailed out insurer American International Group with an $85 billion rescue plan, Lehman Brothers collapsed and Merrill Lynch was bought.
"Emerging market players hold large cash in their hands by selling Treasuries," the trader said.
"I'm sure they have to cover losses in their own equity markets, but they also need to allocate the remaining funds to somewhere and that money is shifting to gold."
On Thursday, prices soared as high as $902.60 on safe-haven buying fuelled by fears that the financial crisis had not yet run its course, but profit-taking kicked in late in the day as the dollar erased losses and stocks rallied.
Rising U.S. equities and liquidity injection into the money market by central banks, including the U.S. Federal Reserve, the European Central Bank and the Bank of Japan, also tempered gains.
U.S. Treasury Secretary Henry Paulson said on Thursday night that he and congressional leaders were working on a plan to "address systemic risks" in the U.S. capital market, with a proposal expected in a matter of hours.
This news, coupled with UK efforts to curb short selling of banks and news that No. 2 investment bank Morgan Stanley was in advanced talks to be bought by Wachovia, helped stem the rush towards safe-haven assets, but investors remained anxious.
"Caution still stays and flight-to-quality buying in gold is continuing," said Tatsuo Kageyama, an analyst at Kanetsu Asset Management in Tokyo.
"But considering the speed of the rise, we could see some technical correction, but on price dips there is plenty of demand from end-users."
Spot gold surged by more than 10 percent or around $90, its biggest one-day amount on record, on Wednesday and looked set to nearly repeat that feat on Thursday until the late sell-off.
Kageyama said strong buying from investors in the Middle East and Asia was detected when the cash price was below $800 and solid demand for gold exchange traded funds (ETFs) around $850.
COMEX gold futures, which settled before the late-day retreat in the spot market, dropped after rising 5.5 percent on Thursday. The most active December contract was trading down $51.9 or 5.8 percent at $845.1 from the New York settlement.
Benchmark August 2009 Tokyo Commodity Exchange (TOCOM) gold futures was up 2.2 percent or 62 yen at 2,870 yen from Thursday when they were pegged at 2,808 yen throughout the day after rising by the daily 150-yen limit.
"The credit crisis won't go away easily, so we expect funds to continue flowing into gold," Kageyama said.
"But the situation for other precious metals is different and especially for platinum. The market is very concerned about the demand outlook."
Spot platinum fell 2.3 percent or $24.50 to $1,064.50 per ounce from late New York, having dipped on Tuesday to a 2-1/2-year low of $1,042 on weakening auto sales and car makers slashing their production plans.
Precious metals prices at 3:37 a.m. EDT
Metal Last Change Pct chg YTD pct chg Turnover
Spot Gold 838.70 -8.55 -1.01 0.72
Spot Silver 11.96 0.12 +1.01 -19.03
Spot Platinum 1063.00 -26.00 -2.39 -30.07
Spot Palladium 222.00 -8.00 -3.48 -39.67
TOCOM Gold 2888.00 80.00 +2.85 -5.62 49247
TOCOM Platinum 3696.00 -28.00 -0.75 -30.77 16192
TOCOM Silver 413.30 11.20 +2.79 -23.60 1273
TOCOM Palladium 797.00 -18.00 -2.21 -41.01 489
Euro/Dollar 1.4203
Dollar/Yen 107.35 TOCOM prices in yen per gram, except for silver which is in yen per 10 grams, spot prices in $ per ounce.
(Editing by Ben Tan)
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