US gold turns sharply down as palladium hits high

NEW YORK, Feb 1 (Reuters) - New York gold futures turned
sharply lower in extremely volatile trade on Friday, as a
dollar surge and heavy profit taking erased the metal's initial
gains following a weak U.S. jobs report.

Palladium surged to a contract high on a combination of
speculative interest, chart-based buying and strength of its
sister-metal platinum.

"The fundamentals (of gold) still remain overwhelmingly
bullish. But I think you're seeing some funds taking profits,
knowing that a lot of small speculative orders are coming in to
buy," said Rob Kurzatkowski, futures analyst with optionsXpress
in Chicago.

"The precious metals are probably not going to finish near
their highs. The dollar actually remains pretty strong and the
equity market is holding up," Kurzatkowski said. He added that
metals investors should see a really choppy day on Friday.

At 11:02 a.m. EST (1502 GMT), the gold contract for April
delivery at the COMEX division of the NYMEX GCJ8 was down
$15, or 1.5 percent, at $913 an ounce, trading between $941.80
and $908.50, a one-week low.

The dollar rose sharply on Friday after a report showing a
U.S. manufacturing activity gauge for January was higher than
expected, helping the U.S. currency recover after some soft
labor market data earlier. [ID:nN01632831]

A lower greenback makes gold, which is denominated in the
U.S. dollar, cheaper for investors holding other currencies.

"We had the rollover (from the February to April contract).
Historically, we'll go down after a rollover, and we've been
holding up brilliantly," said Jonathan Jossen, independent
COMEX floor trader in New York.

The first notice day of the February contract was
Thursday.

"There is good fundamental buying. But there is definitely
arbitrage. When the (stock) market was weak yesterday, we were
weak. It's a market of stocks, and we are moving with
everything," Jossen said.

U.S. stocks pared early gains to trade near unchanged by
midmorning.

Falling crude oil prices also dented gold's appeal as a
hedge against inflation. U.S. crude futures CLc1 traded down
nearly $2, below $90 a barrel.

Spot gold <XAU=> was quoted at $910.30/911.00, versus
Thursday's New York close of $923.80/924.70. London bullion
dealers fixed the afternoon spot price at $914.75.

PALLADIUM SURGES

Palladium surged above $400 an ounce for the first time on
strong speculative interest. Palladium for March delivery
PAH8 rallied $13.55, or 3.4 percent, to $408.05 an ounce,
after rising to a contract high of $417.60.

"People are pretty excited about palladium recently. It
seems that the South African news had spurred platinum.
Overall, palladium's a metal lagging behind platinum. A lot
people are talking about a technical breakout once it gets near
the $400 level," said one New York precious metals broker.

Palladium's major end use is in non-diesel vehicle
catalysts, where it helps clean exhaust gases. Russia is by far
the biggest producer of palladium, followed by South Africa.

UBS Investment Bank told clients in a note that
lower-than-expected shipments from Russia had encouraged
speculators to buy in the palladium market. Unpredictable
supply from Russia had contributed to huge price swings in
palladium in the past.

"But, if we get through the first quarter of 2008 without
additional shipments, there is a good chance that Russian stock
sales have slowed, which would be a very positive development
for palladium," UBS said.

The active NYMEX platinum contract for April delivery
PLJ8 rose $7.10 to $1,744.50 an ounce, after reaching a
record $1,767. Spot platinum <XPT=> fetched $1,755/1,759.

South African mines made slow progress in bringing back
production on Friday after the state power firm allowed them
only limited increases to their electricity consumption.

In other metals, COMEX March silver SIH8 dropped 11.5
cents to $16.880 an ounce. It had initially hit a contract high
of $17.345 and bottomed at $16.765 an ounce.

Spot silver <XAG=> was at $16.81/16.86, compared with its
last Thursday quote of $16.91/16.96. London silver was fixed at
$17.19.
(Reporting by Frank Tang; Editing by Walter Bagley)