Dollar recovery in 2008 to slow gold's surge, says HSBC

By Jonathan Spicer

TORONTO (Reuters) - The battered U.S. dollar is becoming oversold and should recover in the second half of 2008, tempering a record-breaking rise in gold driven more by inflation than any other factor, HSBC's chief commodities analyst said on Sunday.

"We're still looking for strong (gold) prices certainly for the remainder of this year, but perhaps not to average the current levels where we are now," Jim Steel of HSBC Securities told an international mining convention in Toronto.

"We are looking for a (U.S.) dollar recovery from about the second quarter onward," he said. "We believe the dollar is getting oversold."

In the midst of a commodities boom, gold is charging toward $1,000 an ounce as the U.S. Federal Reserve continues to cut interest rates in an effort to boost a slowing economy.

Gold futures are up about 50 percent since last summer and have risen about 17 percent so far this year. The precious metal GCJ8 closed at $975 an ounce in New York last week after surging to a record $978.50.

Uncertainty over global supply, falling U.S. bond yields, and the decline in U.S. real estate as a safe place to invest are also playing key roles in gold's ascent, Steel said.

But bullion's historic function as a hedge against a declining currency has taken center stage in the latest rush.

"If our (HSBC) currency people are right ... and we do get a dollar recovery this year, then we'll begin to see a trickle down (to gold prices)," Steel said on the opening day of the annual Prospectors and Developers Association of Canada convention.