LONDON, Jan 10: Gold drifted lower in Europe on Wednesday as a firmer dollar and weak oil prices prompted investors to trade cautiously, but the long-term outlook for higher prices remained intact, dealers said.

Spot gold dropped as low as $609.00 an ounce before being quoted at $610.60/611.60 by 1113 GMT, against $612.80/613.80 in New York late on Tuesday.

The strength in the dollar in the last couple of days has prompted some long liquidation, but we would expect the dollar to weaken further again and act as a catalyst for gold to move back higher, said Frederic Panizzutti, analyst at MKS Finance.

We are clearly positive for the first half of the year on expectations that the dollar has more downside potential on the back of easing monetary policy in the United States in a context of an extending trade deficit.

The dollar hit 1-1/2 month highs against the euro, Swiss franc and an index of currencies as investors scaled back expectations that the US Federal Reserve would cut interest rates in the coming months.

Gold often moves in the opposite direction to the dollar and is generally seen as a hedge against oil-led inflation.

Oil fell 1.2 per cent, threatening a repeat of the previous session's rout -- sparked by a warm US winter and aggravated by a shift in investment fund money -- that took prices to a 19-month low.

Gold's ability to hold above $600 over the past couple of days has improved the metals technical outlook, with the metal now in the process of establishing a base at $605, said James Moore.

Sentiment is likely to remain extremely volatile short term ... however longer-term sentiment remains firmly bullish with the current dip potentially offering investors an entry point.

Barclays Capital lifted its gold price forecast for 2007 on expectations of a significant depreciation in the dollar over the second half of the year and a recovery in oil prices.

It saw the average gold price at $620 in the first quarter of the current year and at $640, $650 and $670 in subsequent quarters.

But UBS Investment Bank lowered its prediction for gold to $625 in a month from now against its earlier forecast of $660 and to $650 in three months versus a previous prediction of $690.

Dealers said purchases by jewellers in Asia in the past two days helped gold stay above $600 but the metal would be under pressure because of a strong dollar.

In other metals, silver inched down to $12.40/12.50 an ounce from $12.45/12.52, while platinum rose to $1,132/1,137 an ounce from $1,123/1,128. Palladium rose to $330/335 an ounce from $326/330.—Reuters