NEW YORK, June 26 (Reuters) - A dollar rally after Tuesday's U.S. interest rate cut knocked COMEX gold to a 7-week low Thursday but hardly damaged long-term gold bullishness derived from evaporating U.S. yields.
August gold settled down $5.40 at $344.20 an ounce, trading from $348.70 to $343.50, its lowest since May 8. The contract is down $12 this week and off more than $30 since topping at $375.80 on May 27.
Though remaining positive on gold's long-term outlook, overbought traders surrendered their long futures positions, focused almost exclusively on the greenback's rise against the euro, which made gold more expensive for European investors.
Dollar deposit rates are now at 45-year lows and the traditional forward premium earned by speculators and gold producers by selling bullion has long since disappeared.
But dealers said the quarter percentage point Federal Reserve easing on Tuesday would be only marginally constructive for gold after 12 previous rate reductions since early 2001.
"To the extent it makes it cheaper to buy forward, it makes it more attractive. To the extent that no one wants to do that, it doesn't matter," commented a bullion trader. "You kind of buy the rumor sell the news and that's what happened here."
The euro fell to $1.1421 early Thursday, its lowest since May 16 and was near its lows at midafternoon.
Big traders on the COMEX were long more than 264 tonnes worth when gold was peaking in May as the euro rose to $1.1932, its best price in 4-1/2 years of existence.
Last month, funds were even more overbought on the COMEX than in February, when the safe-haven metal rose to 6-1/2 year highs near $390 an ounce on prewar market jitters about the dollar, economy and stock markets.
On the charts, dealers were watching the 200-day moving average at $341 and just below that the $340 an ounce level.
"If it goes through there, it's like 'all you longs come out with your hands up,'" said a staffer at another precious metals trading desk."
But with the benchmark federal funds target rate for overnight interbank lending now at 1.00 percent, nominal rates are close to zero and real yields over inflation are deeply negative, which is a bullish environment for bullion because of its reputation as a store of value against inflation.
"I think the market is near the bottom here. I think we have the potential for a $30 rally in next 2 months," said a COMEX gold broker.
"The only thing we're doing is reacting to the dollar," he said. "As time goes on people will start to think about gold and its relationship to interest rates on its own -- it's bullish."
Spot gold closed at $343.60/4.40, down from $348.50/9.25 late Wednesday. London's afternoon fix was $343.85.
July silver fell 4.2 cents to $4.523, trading between $4.555 and $4.50. Spot silver fetched $4.52/54, down from the close at $4.55/57. The fix was at $4.53.
NYMEX July platinum fell $4.60 to $660.40 an ounce. Spot platinum was lower at $656.00/661.00.
September palladium fell $3.70 to $178.45. Spot palladium was at $174.50/180.50.