Gold turns higher as the dollar and U.S. stocks weaken

By Marcy Nicholson and Clara Denina

NEW YORK/LONDON (Reuters) - Gold turned higher on Wednesday as the dollar fell, U.S. stocks dropped and a Federal Reserve president raised concerns about inflation expectations.

U.S. stocks sold off sharply and a brief rally in beaten-down oil prices stalled after U.S. data added to concerns about an over supplied energy market.

Spot gold was up 0.6 percent at $1,093.25 an ounce at 3:40 p.m. EST (2040 GMT), while U.S. gold futures settled up 0.2 percent at $1,087.10.

"The downturn in equities helped push prices up in the latter part of trade," said James Steel, chief metals analyst for HSBC Securities in New York.

Also late in the session, Chicago Federal Reserve Bank President Charles Evans said he was nervous about the potential effects of China's slowdown on the U.S. economy and about the possibility that inflation expectations may be slipping.

"Evans was erring on the side of fewer, not more, rate rises and that's supportive of gold."

The Fed raised U.S. interest rates in December and attention has shifted to how many increases will follow in 2016. Rate hikes typically lower demand for the non-interest-paying metal while boosting the dollar.

"There is a tendency for gold prices to rise in the first few weeks of the year," said analyst Georgette Boele at ABN Amro.

"But pressure will come back ... and when wider markets get sold, you'd better buy the dollar, which is much more liquid than gold."

Gold rallied to a nine-week top of $1,112 last week, but expectations of

The dollar and risk-sensitive currencies recovered ground against the yen and the euro early in the session, after China's central bank held the yuan steady and better than expected Chinese trade data helped to reduce some of the bearishness towards the world's second-largest economy.

But with Chinese economic growth slowing and its stock markets vulnerable, analysts see it as unlikely that gold will lose too much ground.

China launched interbank gold trading at the beginning of this year as part of a broader drive to open up the country's bullion market and increase financial investment in the world's largest consumer of the precious metal.

Among other precious metals, palladium rose as much as 5.8 percent to $498 an ounce after sliding to a 5-1/2-year low of $449.55 on Tuesday.

"The market had become very oversold and was more likely to snap back," HSBC's Steel said.

Silver gained 2.6 percent to $14.15 an ounce, while platinum was up 1.7 percent at $846.24.

(Additional reporting by Naveen Thukral in Singapore; editing by Katharine Houreld and Grant McCool)