Gold firms as Ukraine tensions, weak dollar lend support

By Jan Harvey

LONDON (Reuters) - Gold prices firmed for a third session on Tuesday as tensions flared between government forces and pro-Russian separatists in Ukraine, while the dollar slid to a 6-1/2 month low against a currency basket.

More than 30 separatists were killed in fighting near the rebel stronghold of Slaviansk in eastern Ukraine, Interior Minister Arsen Avakov said on Tuesday. Fighting intensified around the pro-Russian stronghold on Monday after rebel fighters ambushed Ukrainian forces.

Spot gold was up 0.1 percent at $1,311.10 an ounce at 1109 GMT, while U.S. gold futures for June delivery were up $2.60 an ounce at $1,311.90.

The metal has rebounded after posting hefty losses early last week, as a break above a key chart level at $1,300 and escalating tensions in Ukraine prompted buying, helping it shrug off the impact of strong U.S. jobs data on Friday.

Positive U.S. data usually weighs on gold, as it stokes expectations that the Federal Reserve will continue reining in its bullion-friendly monetary stimulus programme.

"On the balance of last week, gold really should be down because of the good non-farm payrolls data, but that didn't feed through into a stronger dollar," Societe Generale analyst Robin Bhar said.

"This morning you've got a weaker dollar, and there's a safe-haven bid with the deaths in Ukraine, and fighting intensifying. Those are the factors supporting gold."

The dollar came under heavy pressure against the euro after data showed euro zone businesses had a solid start to the second quarter of the year, with activity picking up at its fastest pace in almost three years, suggesting a broad-based recovery is taking hold in the bloc.

A lack of conviction that the Fed will follow a reduction this year of its emergency money-printing with an actual rise in interest rates is at the heart of the dollar's weakness, analysts said. That also bodes well for gold, which benefits from a low interest rate environment.

ASIAN DEMAND SOFT

Demand in Asia was soft overnight, precious metals house MKS said in a note, with Japan, Hong Kong and South Korea all absent for public holidays.

"Very light two-way flows were traded above $1,310 early in the session, with some more buying coming in in the lead-up to the Chinese open," it said.

"It felt like traders were expecting the same reception from the Chinese as yesterday - with the general public in covering shorts - but this never (happened) and the market quickly reversed below $1,310."

Among other precious metals, silver rose for a third session after hitting its lowest since early January last week at $18.82 an ounce. The gold/silver ratio, which measures the number of silver ounces needed to buy an ounce of gold, has retreated to 66.8 from last week's 3-1/2 year high of 67.6.

Spot silver was up 0.7 percent at $19.64 an ounce.

Platinum group metals underperformed after climbing in the previous session on supply worries, with spot platinum flat at $1,443.75 an ounce and spot palladium down 0.2 percent at $812 an ounce.

South Africa's Association of Mineworkers and Construction Union (AMCU) on Monday rejected the latest wage offer by the world's three biggest platinum mining companies, who said the workers were afraid to accept the companies' latest wage offer because of "threats to their personal safety".

South African President Jacob Zuma has accused the AMCU union of irresponsibility for dragging out the platinum strike for almost four months, saying there was a risk of workers losing their jobs because of the dispute.

(Reporting by Jan Harvey; editing by Susan Thomas)