Gold firm near $1,200 on dovish Fed, set for 2nd weekly jump

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold on Friday retained most of its gains from a sharp rally in the previous session, with prices on track for a second weekly jump, bolstered by the Federal Reserve's caution over U.S. interest rate hikes and a softer dollar.

Spot gold eased slightly to $1,200.11 an ounce by 0650 GMT, after a 1.3 percent gain on Thursday, its biggest daily rise since mid-May. It has gained 1.7 percent this week.

Bullion got a boost, while the dollar slid, after Fed policymakers said on Wednesday a hike would be appropriate only after further improvement in the labour market and greater confidence that inflation would rise.

In their projections, Fed officials saw slightly lower rates at the end of 2016 and 2017 than forecast in March and more policymakers were now in favour of hiking rates only once or not at all this year.

The Fed's caution this week comforted investors as bullion has come under pressure this year from expectations that rates will soon rise for the first time in nearly a decade. Higher rates could dent demand for the non-interest-paying asset.

Bullion benefited as "investors likely flocked to safe-haven

assets on concerns over increased risk of a Grexit following the failed talks, amid a more dovish Fed dot-plot chart", said analysts at OCBC Bank, referring to the Greek debt crisis.

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

Despite the jump in gold prices, traders remained cautious.

"There are still material headwinds against a prolonged rally," said MKS Group trader James Gardiner.

Investor positioning remains 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 is sluggish, as a tight price range and better stock-market yields have kept consumers away. Demand could take a further hit with the overnight jump in gold prices.

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.

China's benchmark share indexes fell on Friday, taking losses since their early-June peak to more than 10 percent and putting the market into correction territory.

(Editing by Himani Sarkar)