Gold rallies above $940, dollar drops on China news

NEW YORK (Reuters) - Gold climbed above $940 an ounce on Wednesday, as news that China has asked to debate proposals for a new global reserve currency sent the dollar reeling, highlighting the status of gold as a hedge against a falling U.S. currency.

Investors have recently viewed the dollar as a safe haven. In early June, a resurgent greenback had foiled gold's attempt to break above the $1,000-an-ounce level.

On Wednesday, China asked to debate proposals for a new global reserve currency at next week's Group of Eight summit in Italy and the issue could be referred to briefly in the summit statement, G8 sources said.

"The China news is the factor for today. That was driving the currencies, which are driving the gold," said Andrew Montano, a director at bullion dealer ScotiaMocatta in Toronto.

There were recent signs that China, which holds vast reserves of U.S. currency and Treasuries, was considering a reduction in its exposure to the dollar and to U.S. assets in case America's ultra-loose fiscal and monetary policy rekindles inflation and erodes the value of the dollar.

However, analysts said it was unlikely that the dollar's reserve currency status would be challenged in the foreseeable future.

U.S. August futures settled up $13.90, or 1.5 percent, at $941.30 an ounce on the COMEX division of the New York Mercantile Exchange.

Spot gold traded at $941.05 an ounce at 2:31 p.m. EDT, up from $925.85 quoted late in New York on Wednesday.

In addition, long-term inflation expectations were boosting gold's appeal and further data reinforcing those views would help the metal to build on its gains.

"The gold market has been firm ever since the Fed announced the shift to quantitative easing ... That is the reason gold is above $900 at the moment and not below," said James Steel, an analyst at HSBC in New York.

BUYERS WADE IN

David Wilson, analyst at Societe Generale, said buyers of physical gold were slowly wading back into the market, while flows of scrap gold were showing signs of stabilization.

Holdings by the world's largest gold-backed exchange-traded fund, the SPDR Gold Trust, fell again on Tuesday, this time by 5.19 tonnes to 1,120.55 tonnes as of June 30. The holdings are down 13.48 tonnes from a record high on June 1.

SPDR holdings have declined in the past few weeks as a sense of optimism about the global economy sapped investors' appetite for bullion as a safe-haven asset..

In other precious metals, spot silver rose to $13.74 an ounce against $13.57 in New York, while platinum gained rose to $1,200 versus $1,172.50 previously and palladium climbed to $252.00 from $248.00.

Major automakers posted better U.S. auto sales for June than in recent months on Wednesday, led by Ford Motor Co (F.N) as results pointed to signs of some stabilizing in the hard-hit industry.

Commodities research firm CPM Group said that the platinum market will see a narrower market surplus in 2009 on the back of strong investment demand from platinum-backed, exchange-traded funds, but the health of the auto industry will remain the key to the metal.

(Additional reporting by Nick Vinocur in London and Risa Maeda in Tokyo; Editing by Christian Wiessner)