Gold hits 3-1/2 week high as Yemen air strikes rattle markets

By Jan Harvey

NEW YORK/LONDON (Reuters) - Gold hit a 3-1/2 week high on Thursday and silver rose nearly 3 percent as escalating tensions in the Middle East knocked stocks and the dollar and drove investors into assets viewed as lower risk, such as bullion and German bonds.

European stocks tumbled 1.3 percent, the dollar fell and oil prices leapt up to 6 percent after Saudi Arabia and its Gulf Arab allies launched air strikes in Yemen to counter Iran-allied forces besieging the southern city of Aden. (Full Story) MKTS/GLOB

Spot gold XAU= reached a peak of $1,219.40 an ounce, before retreating slightly to trade up 0.9 percent at $1,206.16 at 1441 GMT. U.S. gold GCv1 for April delivery was up $8.40 an ounce at $1,205.40.

"If the situation in the Middle East did not improve, prices could continue to rise, but otherwise they are likely to fall back below $1,200," Commerzbank commodity analyst Daniel Briesemann said.

"Prices have soared 2 percent this morning on Yemen but in general underlying demand is not generated by risk events and fundamentally I don't see a reason gold would move significantly in either direction in the short term."

Gold was heading for a seventh session of gains, its longest winning streak since 2012. Soft U.S. data earlier this week boosted expectations that the Federal Reserve will keep interest rates low for the time being, lifting gold.

The metal had fallen to a four-month low of $1,142.86 on March 17, when markets had been largely pricing in the Fed was on track to raise interest rates for the first time in nearly a decade as early as June. Higher interest rates favour the dollar and the opportunity cost of holding non-yielding bullion.

It bounced from that low, however, after the U.S. central bank sounded caution about the pace of any rate increases at its policy meeting last week.

Investors remained wary over gold's outlook, with continuing outflows from SPDR Gold Trust GLD, the world's largest gold-backed exchange-traded fund. The fund's holdings fell 0.2 percent to 743.21 tonnes on Wednesday.

Physical demand was also slowing, hit by the rally in prices. In China, the second-biggest gold consumer, premiums - an indication of demand - eased to about $2-$3 an ounce, compared with $6-$7 last week.

China's gold imports from Hong Kong fell in February from the previous month, data showed on Thursday, as purchases slowed ahead of the Lunar New Year holiday.

Among other precious metals, platinum XPT= was up 0.4 percent at $1,152.80 an ounce, while palladium XPD= rose 0.8 percent to $768.46 an ounce.

Silver prices outperformed gold, rising 2.7 percent in early trade and reaching a three-month high at $17.38. It was later up 0.7 percent at $17.04 an ounce.

(Additional reporting by Clara Denina; Editing by Susan Thomas and David Goodman)