Gold hits 7-week high as worries over China hurt stocks

By Marcy Nicholson and Jan Harvey

NEW YORK/LONDON (Reuters) - Gold prices hit a seven-week high on Wednesday, rising for a third session as persistent concerns over the Chinese economy battered stock markets, while tensions simmered in the Korean peninsula and the Middle East.

Prices held gains after minutes from the December U.S. Federal Reserve meeting, at which policymakers decided to raise interest rates, showed some voiced worries inflation could get stuck at dangerously low levels.

Spot gold was up 1.5 percent at $1,093.62 an ounce at 2:55 p.m. EST (1955 GMT), off a peak of $1,095.30, its highest since Nov. 16. U.S. gold futures for February delivery settled up 1.3 percent at $1,091.90 an ounce prior to the release of the minutes.

"The December Fed minutes offered little lucidity to the timing of the next or the number of rate hikes in 2016," said Tai Wong, director of base and precious metals trading for BMO Capital Markets in New York, adding that the lack of any revelation kept gold near its session highs.

"However, the ability of monetary policy to offset the economic effects of an unanticipated economic shock remained asymmetric. That is translated as 'we want to reload the darn weapon."

The Fed is expected to hike rates further this year though the number of increases remains up for debate.

World stocks fell for a fifth day as China fuelled fears about its economy by allowing the yuan to weaken further, and a nuclear test by North Korea added to a growing list of political worries.

"(The) geopolitical situation along with a cocktail of global market sell-offs is fuelling this move," said Naeem Aslam, chief market analyst at Ava Trade.

North Korea said it successfully tested a miniaturised hydrogen nuclear device on Wednesday, setting off alarm bells in Japan and South Korea.

"Some risk aversion prompting safe-haven flows has helped gold," Societe Generale analyst Robin Bhar said. "Physical demand has been pretty strong at the lower levels."

The U.S. dollar turned negative after the minutes were released.

Gold broke above a key chart level at $1,088, which could indicate prices have bottomed for now after twice rebounding from the $1,045 area in December, analysts said.

Silver was up 0.4 percent at $14.02 an ounce, while platinum was down 1.5 percent at $874.75 an ounce and palladium was down 4.8 percent at $508.50 an ounce, its biggest drop in four months.

Palladium prices fell to their lowest in nearly 5-1/2 years in earlier trade at $501.55 an ounce. The autocatalyst metal, as a largely industrial commodity, is more exposed than gold to economic weakness.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by Dale Hudson and Chizu Nomiyama)