Gold hits 3-1/2-week low as yields surge, dollar firms

By Eric Onstad

LONDON (Reuters) - Gold hit the lowest levels in over three weeks on Friday, weighed down by rising bond yields and a firm dollar due to inflation fears from the prospect of a splurge of U.S. infrastructure spending.

Spot gold was down 0.3 percent at $1,255.85 an ounce at 1110 GMT, paring losses after hitting $1,250.70, the weakest since Oct. 17. It has declined over 3 percent so far this week.

U.S. gold futures fell 0.9 percent to $1,255.40 per ounce after falling as much as 1.3 percent to a four-week low of $1,250.40 earlier.

"We're seeing a complete reassessment of various asset classes following the Trump win earlier this week. The combination of rising real yields and the stronger dollar is really hurting sentiment in gold," said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen.

The dollar was on course for its best week in a year, driven by expectations of rising U.S. inflation if President-elect Donald Trump delivers on promises to boost public spending and put barriers on cheap imports.

The market is also betting on the Federal Reserve raising interest rates more quickly. Gold is highly sensitive to rising rates, which lift the opportunity cost of holding non-yielding assets such as bullion, while boosting the dollar, in which it is priced.

"We're close to testing the key trendline support at $1,252, and a break of that could initially see us return to lows we saw in the sell-off in early October," Hansen added.

But gold was supported on the downside by physical buying in Asia.

Gold premiums in India jumped to their highest in 21 months, as demand surged after the government abolished two high-value currency notes, while bargain hunting propped up demand and premiums in leading consumer China.

"Some strong physical buying at the lower end is keeping gold from not falling too much. Whenever there is a dip, we have seen strong buying," Ronald Leung, chief dealer at Lee Cheong Gold Dealers in Hong Kong, said.

Silver and platinum were slightly firmer, buoyed by their industrial qualities as investors bet on more demand from higher infrastructure spending, which has sent base metals surging.

Silver crept up 0.4 percent to $18.62 an ounce, heading for a fourth consecutive weekly rise.

"On the week, we're seeing a 6 percent outperformance of silver relative to gold, clearly due to its industrial qualities in a world where speculation is moving towards increased fiscal spending," Hansen said.

Platinum added 0.6 percent to $977.60 an ounce after hitting a two-week low of $958.50 earlier in the session.

Palladium dipped 0.6 percent to $684.47 an ounce after rising to its highest since Oct. 5 at $697.90 earlier.

(Additional reporting by Apeksha Nair and Nallur Sethuraman in Bengaluru; Editing by Ruth Pitchford)