Gold holds gains from two-day rally as dollar retreats

By Jan Harvey

LONDON (Reuters) - Gold held near $1,080 an ounce on Tuesday after a two-day rally, supported by a retreat in the dollar, though uncertainty over the pace of U.S. interest rate increases capped gains.

The metal has risen 3 percent since touching its lowest in almost six years last week after the Federal Reserve unveiled its first rate rise in nearly a decade.

Spot gold stood at $1,077.61 an ounce at 1239 GMT, little changed from $1,078.06 late on Monday, while U.S. gold futures for February delivery were down $3.20 at $1,077.40.

Rising interest rates boost the opportunity cost of holding non-yielding gold, while lifting the dollar, in which it is priced. Expectations that rates would rise have pushed down gold by 9 percent in 2015, though it has steadied towards the end of the year.

Hedge funds held a record short position going into last week's Fed hike and have been reducing their negative exposure in recent days, Saxo Bank said in a note.

"When you get close to the end of the year, liquidity is getting smaller and people start closing the trades they have had for the year," ABN Amro analyst Georgette Boele said. "One of them was short euro, long dollar, short gold."

"We probably didn't get as low as some people may have wanted, so they're closing (their trades) and they'll try again next year," she said.

"The dollar is a bit under pressure ... that is absolutely helping (gold)."

The dollar fell 0.3 percent against the euro on Tuesday but remained rangebound, with dealers increasingly confident of ruling out big moves before year-end as volumes sagged. [FRX/]

Traders will be watching U.S. GDP data at 1330 GMT for fresh clues on the health of the U.S. economy. The Fed has linked the pace of future rate rises to the strength of U.S. data.

While gold drew support from a big rise in holdings of the top gold exchange-traded fund (ETF) late last week, a resumption in outflows this week indicated that investors remain cautious.

SPDR Gold Shares' assets rose by nearly 19 tonnes on Friday, the biggest in four years, but that was followed by outflows of 3 tonnes on Monday. [GOL/ETF]

"The jump in gold ETF demand is impressive after the string of losses over the past couple of years, but the market will likely need to see further accumulation for the rally to be extended," HSBC said in a note.

Silver was up 0.2 percent at $14.29 an ounce, while platinum was down 0.3 percent at $870.75 and palladium gained 1 percent to $553.75.

(Additional reporting by A. Ananthalakshmi in Singapore; Editing by David Goodman)