Gold rises after slide, eyes best month in nearly a year

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By Manolo Serapio Jr

SINGAPORE (Reuters) - Gold edged up on Friday after falling more than 2 percent to a two-week low overnight on concerns over a looming increase in U.S. interest rates, with bullion still on track for its biggest weekly drop in two months.

Other precious metals steadied after Thursday's broad-based slide that saw silver lose as much as 7 percent.

But gold is still on track to post its biggest monthly gain in almost a year after a recent rally fuelled by the European Central Bank's multi-billion euro bond-buying program.

Despite the threat of U.S. monetary tightening, increased liquidity through the ECB's stimulus should support gold going forward, said Victor Thianpiriya, analyst at Australia and New Zealand Banking Group.

"The overriding theme for the next 12 months for precious metals is that there's going to be a lot more liquidity that's being added to the system via the ECB and the U.S. economy is going to have to continue to outperform in order to attract investment dollars," said Thianpiriya, who sees bullion at $1,280 by year-end.

"The risk is whether the U.S. can really sustain this level of growth particularly with wages growth still quite tepid."

Spot gold was up 0.3 percent at $1,260.08 an ounce by 0229 GMT, after falling as low as $1,251.86 on Thursday, its weakest since Jan. 15. Gold's 2.2-percent drop overnight was its steepest since mid-December.

The precious metal has lost 2.6 percent so far this week. But it was still up 6.5 percent for January, on track for its largest monthly gain since February last year after touching a five-month high of $1,306.20 last week.

U.S. February gold gained 0.4 percent to $1,259.90 an ounce, after tumbling 2.4 percent on Thursday.

Spot silver was little changed at $16.90 an ounce after sliding overnight by the most since September 2013. U.S. silver advanced 1 percent after falling over 7 percent.

The Federal Reserve painted a bullish view of the U.S. economy after its first policy meeting this week that analysts say puts it on course to raise interest rates as early as June.

That dimmed the appeal of non-interest yielding assets such as gold, which Phillip Futures expects to fall below $1,200 again once the first U.S. rate hike occurs.

Investors will next be eyeing U.S. fourth-quarter gross domestic product data due out at 1330 GMT that may show a solid pace of economic expansion as the Fed had described in its policy statement on Wednesday.

(Editing by Himani Sarkar)