Gold hits 3-week high after China rate cut, ECB comments

By Frank Tang and Jan Harvey

NEW YORK/LONDON (Reuters) - Gold climbed above $1,200 an ounce on Friday to its highest in three weeks, helped by short-covering and after a surprise interest rate cut by China fueled hopes that demand would rise in the world's biggest consumer of the metal.

Also underpinning gold's inflation-hedge appeal were remarks by European Central Bank President Mario Draghi that opened the door for more drastic measures to prevent deflation. In addition, the ECB said it had started buying asset-backed securities, in a move to encourage banks to lend and revive the economy.

"China adding stimulus, the Draghi comments and ECB buying some debt all mean that traders are especially keen on covering shorts before weekend and ahead of next week's OPEC meeting," said George Gero, vice president of RBC Capital Markets.

Spot gold was up 0.9 percent at $1,204.56 an ounce by 11:10 a.m. EST (1610 GMT), having earlier touched its highest in three weeks at $1,207.70.

U.S. gold futures for December delivery were up $13.50 an ounce at $1,204.40.

Technical buying accelerated as the metal broke through a key psychological mark at $1,200 an ounce, traders said.

China cut its benchmark interest rates for the first time in more than two years to lower borrowing costs and lift a cooling economy.

"Any measures that accelerate the spending power of the Chinese public are bound to be positive for gold," Mitsubishi analyst Jonathan Butler said.

A 0.7 percent rise in the dollar index after the ECB news, however, kept gold from rising further. Gold is priced in dollars and tends to fall as the U.S. currency strengthens. [FRX/]

Traders also digested news of central bank sales and purchases. Ukraine cut its gold reserves by more than a third in October, data from the International Monetary Fund showed, while Russia raised its gold holdings for a seventh straight month.

Among other precious metals, silver was up 2 percent at $16.54 an ounce, platinum rose 1.9 percent to $1,232.30 an ounce, and palladium was up 2.9 percent at $790 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Jane Baird and Bernadette Baum)