Gold holds close to seven-week high on safe-haven demand

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold rose for a third session in a row to trade close to a seven-week peak on Wednesday as weakness in the dollar and global equities prompted investors to seek safety in the precious metal.

The dollar index nursed hefty losses after a brutal shakeout of bullish positions, with investors finding excuses to take profits as the year-end looms.

Global equities took a hit from political turmoil in Greece and after China's market posted its worst day in five years.

"The best chance for gold to go higher would be for the financial market to become unnerved over equity declines in China, fresh sovereign risk worries in the euro zone and currency market volatility," said HSBC analyst James Steel.

"There may be some additional short covering left in the market, especially if Asian equities wobble further. Further gains will begin to crimp price-sensitive Asian demand and could threaten one of the planks of the recent rally," he said.

Spot gold rose 0.5 percent to $1,236.10 an ounce by 0718 GMT. The metal jumped to $1,238.70 in the previous session, its highest since Oct. 23, before closing up 2 percent.

SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings rose 0.37 percent to 721.81 tonnes on Tuesday, another factor that could boost prices.

The fund's holdings are still very much near six-year lows as bullion investors worry that an expected hike in U.S. interest rates could dull demand for the metal.

Recent strong U.S. economic data had prompted investors to believe a rate hike could come soon. Gold slumped to a four-and-a-half-year low last month.

As a non-interest-bearing asset, gold would have taken a hit from higher rates, but this week's comments from Fed officials helped calm investor nerves.

Dennis Lockhart, head of the Atlanta Federal Reserve, said he was in no rush to drop the Fed's pledge to keep interest rates near zero for a "considerable time", while San Francisco Fed chief John Williams said the phrase was still appropriate.

In news from the physical markets, strong investor demand lifted American Eagle Silver Bullion coin sales to a record for the second straight year, the U.S. Mint said.

Traders were also watching regulatory developments in major consumer India, which could announce changes to import policies, according to a source.

(Reporting by A. Ananthalakshmi; Editing by Joseph Radford and Prateek Chatterjee)