Gold climbs on weak dollar; rate outlook caps gains

By Eric Onstad

LONDON (Reuters) - Gold edged higher on Friday, lifted by a weaker dollar, but gains were tempered by expectations of a U.S. rate hike later this month.

The dollar index slipped to a 1-1/2 month low after weaker-than-expected U.S. inflation data and a recovery in emerging markets, but had recovered to trade nearly flat in the European afternoon.

Spot gold was up 0.3 percent at $1,204.83 an ounce by 1225 GMT, having hit its highest since Aug. 28 at $1,212.65 on Thursday. It has risen 0.9 percent so far this week, on track for its first weekly gain in three.

U.S. gold futures were up 0.2 percent at $1,210.40 an ounce.

"We've seen quite a bit of weakness in the dollar which has supported gold, but we're not out of the woods yet," said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen.

"The fact that gains weren't stronger has still got to do with gold's focus on the Chinese renminbi, which remains a bit challenged, but also that the market is starting to look forward to the next U.S. rate hike."

Gold has shown a close correlation to the currency of China, the biggest gold consuming nation, analysts say.

Investors widely expect another 0.25 percentage point interest rate hike when the U.S. central bank meets on Sept. 25-26, and there is a strong chance of another increase in December.

Higher rates make gold less attractive since it does not pay interest but costs money to store and insure.

The months-long trade tension between Washington and Beijing has prompted investors to buy the U.S. dollar in the belief that the United States has less to lose from the dispute.

However, the demand for the dollar eased this week on news that the White House had invited Chinese officials to restart trade talks.

Gold prices have declined about 12 percent from a peak of $1,365.23 in April amid intensifying global trade tensions and under pressure from rising U.S. interest rates. This has driven investors towards record short positions in Comex gold and heavy liquidations in gold exchange-traded funds (ETF).

Holdings of SPDR Gold, the largest gold ETF, were down 0.4 percent on Thursday and 4.1 million ounces from a April peak.

Meanwhile, spot silver rose 0.4 percent to $14.22 per ounce, palladium added 0.4 percent to $986.50 per ounce and platinum gained 1.1 percent to $808.90 an ounce after touching a one-month high of $812.30 on Thursday.

"We've seen some traders dipping their toes back in platinum, which is at a near record discount to gold," Hansen said.

"That's probably platinum's best friend at the moment, that it's relatively cheap, because the concerns about growth and car manufacturing are still providing some headwinds."

The discount of platinum to gold has narrowed to $397 an ounce from $417 a week ago and a record of $426 in April.

(Additional reporting by Nallur Sethuraman in Bengaluru; Editing by Louise Heavens and Mark Potter)