Gold set for 7th weekly drop in eight as US rate rise bets mount

A rate increase at the Federal Reserve's policy meeting could dent demand for non-interest paying gold

Gold drifted lower on Friday and was headed for the seventh weekly drop in eight as investors positioned themselves for a likely U.S. rate rise.

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.

Spot gold fell 0.6% to $1,064.63 an ounce by 1112 GMT, after closing flat over the last two sessions. It was on track for a 2% decline for the week.

"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."

The dollar steadied, gaining against China's yuan after Beijing set the mid-point for the currency's tightly controlled official onshore value at its lowest in more than four years.

A higher U.S. currency makes dollar-denominated gold more expensive for holders of other currencies.

Technically, a break below $1,064 could take gold to a near-six-year low of $1,045.85, according to Reuters technical analyst Wang Tao.

Weakness in crude oil prices, near 2009 lows, was also hurting bullion prices. A slide in oil could trigger fears of deflation, a bearish factor for gold, which is often used as a hedge against oil-led inflation.

Short positions in COMEX gold futures and options are at record highs, while assets in SPDR Gold Trust, the top bullion exchange traded fund, are at their lowest since September 2008.

Investors have boosted bets that the gold price will soon drop to $1,000 an ounce, options data shows.

Gold, on track for a third straight annual decline, has lost 9.8% of its value this year.

Among other precious metals, silver and platinum were also headed for a seventh weekly loss in eight weeks. Silver was down 1.4% at $13.96 an ounce, while platinum fell 0.6% to $846.05 an ounce.

Palladium was up 0.7% at $542.70 an ounce, but down 3.6% for the week.