Gold adds to gains but looming U.S. rate hike weighs

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold extended gains on Wednesday, supported by softness in the dollar, but the metal's upside was limited as investors anticipated a Federal Reserve rate hike next week.

Bullion traders are not optimistic of a sustained rally in prices as the U.S. central bank is widely expected to raise interest rates for the first time in nearly a decade at its next policy meet on Dec. 15-16.

Higher rates are expected to dent demand for non-interest-paying gold, which has already lost 9 percent of its value this year in anticipation of the rate hike.

Spot gold rose 0.3 percent to $1,077.06 an ounce by 0347 GMT, after rising 0.4 percent on Tuesday as the dollar slid against a basket of major currencies. The metal is about $30 higher than a near-six-year low reached last week.

"Gold will consolidate in the $1,065 to $1,085 range ahead of the Fed meeting," said Ronald Leung, chief dealer at Lee Cheong Gold Dealers Ltd in Hong Kong.

Bullion is tracking the dollar for now, he said.

The dollar slipped for a second day against other major currencies on Wednesday, after climbing to a 12-1/2-year high last week on expectations of the rate hike.

Gold traders chose to cover their shorts on the dollar weakness. Speculators' net short positions in COMEX gold futures and options were at a record high in the week to Dec. 1, according to the most recent data.

Investors have been boosting bets that gold will soon drop to $1,000 an ounce, options data show, ahead of next week's Fed meeting.

The slide in commodity prices, particularly crude oil, is also weighing on gold. Crude has fallen to its lowest in nearly seven years as OPEC continues to pump near-record amounts of oil to defend market share.

Weakness in oil could trigger fears of deflation, a bearish factor for gold, which is often used as a hedge against oil-led inflation.

(Reporting by A. Ananthalakshmi; Editing by Richard Pullin and Tom Hogue)