Gold down on recovering dollar, still set for 2nd weekly jump

By Clara Denina

LONDON (Reuters) - Gold inched lower on Friday, as the dollar recovered versus the euro on worries over Greece's future, but prices were on track for a second weekly gain, bolstered by the Federal Reserve's caution over U.S. interest rate hikes.

Spot gold eased 0.1 percent at $1,200.36 an ounce by 1007 GMT, after a 1.3 percent gain on Thursday, its biggest daily rise since mid-May. Prices have gained 1.6 percent this week so far, the biggest weekly increase in over a month.

Gold had risen to a three-week high on Thursday, due to a softer dollar after Fed policymakers said a hike would be appropriate only after further improvement in the labour market and greater confidence that inflation would rise.

"Despite this week's dovish message from the Fed, we are fundamentally closer to a U.S. rate hike," Danske Bank senior analyst Jens Pedersen said.

"The rate move, a stronger dollar and the re-pricing of the U.S. yield curve will limit any upside going forward."

Non-interest-paying gold has benefited from a record-low interest rates environment over the years following the 2008-2009 credit crisis. Higher rates would increase the opportunity cost of holding the metal.

Gold, typically seen as a good bet in times of financial and economic uncertainty, has barely reacted to he unfolding of the Greek crisis, with demand failing to emerge robustly.

Gold in euro terms was trading around 9 percent lower than a near-two-year peak hit in January.

"To some extent Greece has been a support element for gold lately, not because of retail demand kicking in but because of the wider market risk-off sentiment," Pedersen said.

Athens and its international creditors remain deadlocked over a debt deal. Euro zone leaders will hold an emergency summit on Monday to try and avert a Greek default after bank withdrawals accelerated and government revenue slumped.

Investor positioning remained bearish, with assets of top gold-backed exchange traded fund SPDR Gold Trust at their lowest since 2008, and speculators increasing short positions.

Asian physical demand was also sluggish, as a tight price range and better stock-market yields have kept consumers away.

In China, prices on the Shanghai Gold Exchange fell to a discount of up to $2 an ounce to the global price, from a premium of about $1-$2 on Thursday, indicating weak demand.

A drop in local stock markets also failed to bring investors back to gold.

Silver was down 0.3 percent at $16.11 an ounce, while palladium lost 0.4 percent to $716, after hitting a 16-month low in the precious session.

Platinum was up 0.2 percent at $1,080, still within sight of a six-year low of $1,066.50 hit on Wednesday.

(Editing by William Hardy)