Gold edges up after two-day drop in pre-holiday trade

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold rose in thin pre-holiday trade on Thursday, after two days of losses, on a softer dollar and as oil prices extended a recovery from multi-year lows.

Spot gold rose 0.3 percent to $1,073.60 an ounce by 0655 GMT, after losing 0.7 percent in the last two sessions.

Many financial centres around the world will shut early on Thursday and stay closed on Friday for the Christmas holidays. Some will remain shut on Monday.

"Gold prices will be determined more by trading volume, than any monetary or fundamental development over the holiday period," HSBC analyst James Steel said. "Low trading volume leaves prices open to sharp movements one way or another on relatively little buying or selling."

"If oil continues to rally we think this would eventually feed into real gains for gold prices," he said.

Gold is positively correlated to oil as the metal is seen as a hedge against oil-led inflation.

U.S. crude prices rose for a fourth straight session on Thursday, after hitting their lowest since early 2009 on Monday. The benchmark has risen almost 9 percent so far this week in the lead-up to Christmas as the market tightened on falling supplies and looming exports. [O/R]

The dollar index, a measure of the greenback's strength against a basket of major currencies, slipped on Thursday for a fourth session out of five after recent mixed U.S. data.

New orders for U.S. manufactured capital goods fell in November and the prior month's increase was revised sharply lower, while other data showed consumer sentiment at a five-month high in December and personal income rising for an eighth straight month in November.

A softer greenback boosts demand for dollar-denominated commodities such as gold.

However, the outlook for gold remains largely bearish with many predicting a drop below $1,000 in the next few months.

Bullion prices have shed 9 percent so far this year, a third year of losses, mostly due to expectations the U.S. Federal Reserve would raise interest rates, which it did this month.

With the first U.S. rate increase in nearly a decade out of the way, the focus is now on the pace of future hikes.

Investors believe higher rates would dent demand for non-interest paying gold.

(Reporting by A. Ananthalakshmi; Editing by Himani Sarkar)