Gold jumps 2.6 percent on U.S. interest rate outlook

By Clara Denina

LONDON (Reuters) - Gold climbed to its highest in almost nine months on Thursday as the dollar, U.S. Treasury yields and equity markets dipped on bets that the Federal Reserve could find it hard to raise U.S. interest rates this year.

The Fed is unlikely to reverse its plan to increase rates further this year, but tighter credit markets, volatile financial markets and uncertainty over Chinese economic growth will only allow gradual adjustments to monetary policy, Federal Reserve Chair Janet Yellen said on Wednesday.

A slowing of rate increases could help bullion, keeping down the opportunity cost of holding gold.

Spot gold jumped 2.6 percent to $1,229.40 an ounce, its highest since May 18, and was up 2.5 percent at $1,227.20 at 1110 GMT.

U.S. gold also rose to its highest in nearly nine months, at $1,230.40 an ounce.

Longer-term U.S. debt rallied as investors wagered that the Fed would either be unable to tighten at even a gradual pace, or that if it does increase rates that would only hasten the arrival of recession and deflation.

The benchmark 10-year U.S. Treasury yield fell to its lowest since May 2013 at about 1.6 percent. Because gold does not pay interest, the fall in returns from U.S. bonds is seen as positive for the metal.

The spread between 10-year and two-year U.S. Treasuries shrank to its narrowest since late 2007.

"We have a good explanation for gold's rally; it is to do with worries about the U.S. economy and the rest of the world," Macquarie analyst Matthew Turner said.

"Investors are concerned that central banks' solution (is) negative interest rates or at least not raising rates - and that is gold friendly. The key risk to gold is that the U.S. economy manages to put in a good performance, like it did last year."

Gold prices were aided by a lower dollar, which makes the metal cheaper for holders of other currencies.

European shares fell sharply, dragged down by a renewed slump in banks and miners, while Sweden's central bank delivered a surprise cut to interest rates that are already deep into negative territory.

Gold-backed exchange-traded funds (ETFs) have recorded net inflows since the start of the year, signalling renewed investor interest.

"Investors are returning to gold as a core diversifier and safe haven investment," James Butterfill, head of research at ETF Securities, said in a note. "Given the increasingly challenging investment and economic environment, we expect this trend to continue."

Silver rose 1.9 percent to $15.60 an ounce, its highest since November 2015.

Spot platinum climbed 1 percent to $942.88, while palladium rose 0.6 percent to $523.

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