Gold gains on weaker dollar, chance of slower U.S. rate hikes

By Swati Verma

BENGALURU (Reuters) - Gold firmed on Tuesday as expectations that the U.S. Federal Reserve may slow its interest rate hike trajectory next year weighed on the dollar and stoked interest in bullion, which as a non-yielding asset tends to suffer from rising rates.

Spot gold was up 0.2 percent at $1,247.38 per ounce, as of 1100 GMT. It touched its highest in nearly five months at $1,250.55 in the prior session.

U.S. gold futures were 0.3 percent higher at $1,252.90 per ounce.

"Fed funds futures pricing has been reducing the market expectations for hikes over the next 18 months and that has been coming through in a slightly softer dollar and a stronger gold price," said Marcus Garvey, analyst at ICBC Standard bank.

"As real interest rates in the U.S. approach a neutral level, we think the Fed is going to get incrementally cautious and won't be hiking rates in such a metronomic fashion. In light of that, we think prices could rally back into the high $1,200s."

The U.S. Federal Reserve is widely expected to raise rates at its Dec. 18-19 meeting, but the market is focusing on how much further it might raise rates next year.

Based on prices of Fed fund futures, traders now see a 73 percent chance of a rate hike next week, and just a 49 percent chance of a further rate hike by the end of next year.

Meanwhile, investors also kept a close eye on developments surrounding Britain's departure from the European Union after Britain's prime minister postponed a vote on her deal.

"Postponing the vote - probably until mid-January - means that the UK government has even less time for the entire Brexit procedure. Most importantly, it means continued uncertainty, which should keep demand for gold at a high level," Commerzbank analysts said in a note.

Gold, seen as a safe investment during uncertain times, has risen about 8 percent from a 19-month low touched in mid-August.

Meanwhile, hedge funds and money managers trimmed their net short positions in Comex gold contracts in the week to Dec. 4, data showed on Monday.

"There remains significant scope for the market to further increase long positions and to further reduce short positions. A weaker dollar, driven by moderating Fed policy, could provide the market with the necessary impetus," Societe Generale said in a note.

Among other precious metals, spot silver was up 0.5 percent at $14.61 per ounce, while palladium rose 2 percent to $1,242.50.

Platinum was down 0.5 percent at $781.50 per ounce. Prices had slipped to their lowest since Sept. 10 at $773.50 in the previous session.

(Reporting by Swati Verma in Bengaluru)