Gold rebounds on dollar, still set for weekly fall

By Marcy Nicholson and Clara Denina

NEW YORK/LONDON (Reuters) - Gold prices bounced on Friday, erasing earlier losses as the dollar and U.S. Treasury yields fell, but was still on track for a seventh weekly drop in eight as investors positioned themselves for a likely U.S. rate rise next week.

A rate increase at the Federal Reserve's policy meeting on Dec. 15-16 would be the first in nearly a decade and could dent demand for non-interest paying gold.

"Temporary short squeezes could disturb the long-term downward trend but we still expect prices around $1,000 next week," ABN Amro analyst Georgette Boele said.

Spot gold , lower initially, was up 0.7 percent to $1,078.76 an ounce at 2:20 p.m. EST (1920 GMT). It was on track for a 0.7 percent decline for the week.

"The euro/U.S. dollar bounce and 10-year U.S. Treasuries easing today have helped lift gold prices, and trump the weakness in oil and expectations for a rate hike next week," said Suki Cooper, precious metals analyst for Standard Chartered Bank in New York.

The dollar fell 0.4 percent against key world currencies. China's yuan fell to a 4-1/2-year low after the International Monetary Fund approved its inclusion in its basket of reserve currencies on Nov. 30. The drop raised concerns that its weakness could weigh on the global economy.

Meanwhile, gold prices ignored weak crude oil prices, which flirted with 11-year lows. Weakness in oil prices could trigger fears of deflation, a bearish factor for gold, which is often used as a hedge against oil-led inflation.

"What we are likely to see in the next three months is the discussion moving from the rate hike to the pace of rate tightening cycle," ETF Securities strategist Martin Arnold said.

"A broad range between the high $1,080s to $1,030 is where we are going to see gold in the first quarter, starting towards the lower end of the range in a knee-jerk reaction to the Fed's move and then grinding higher throughout Q1."

Options data shows that investors have boosted bets that the gold price will soon drop to $1,000 an ounce while assets in SPDR Gold Trust, the top bullion exchange traded fund, are at their lowest since September 2008.

Other precious metals were weak, with silver falling to the lowest since August 2009 at $13.76 per ounce.

Silver and platinum were headed for a seventh weekly loss in eight weeks, with spot platinum down 0.8 percent to $842 an ounce.

Palladium was up 0.6 percent to $541.56 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore; editing by David Evans and Marguerita Choy)