Gold set for best week in 10 months; traders cautious ahead of data

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold was heading for its biggest weekly gain in 10 months on Friday as a modest bounce in oil prices boosted demand for the metal as an inflation-hedge, but investors were nervous ahead of a key U.S. jobs report that could trigger sharp moves.

The U.S. non-farm payrolls report is keenly watched as a gauge of economic strength and for its impact on the dollar and the Federal Reserve's monetary policy.

A strong report could prompt the Fed to raise rates soon and boost the dollar. Investors fear higher rates could dull the appeal of gold, a non-interest-bearing asset.

The report is expected to show that employers added 230,000 new jobs last month, and the unemployment rate remaining unchanged at 5.8 percent, according to a Reuters poll.

"Should tonight's numbers exceed 230,000 it could send gold tumbling quickly," said Howie Lee, an analyst at Phillip Futures, adding that support could come in at $1,140.

"(A strong report) should set the tone for gold to languish below $1,200 for the rest of the year and leave gold to end the year in red territory."

Spot gold was little changed at $1,205.60 an ounce by 0730 GMT. The metal was set for a 3.3-percent gain for the week, its biggest jump since February.

In recent months, strong U.S. data and a robust dollar have pushed gold close to four-and-a-half-year lows. The slump in oil prices to five-year lows has also added pressure.

Gold traders were also tracking developments regarding stimulus measures in Europe.

On Thursday, the European Central Bank put off until next year a decision on whether to increase its stimulus, a delay that indicated rates will not be pressured lower for the time being.

The resulting rally in the euro knocked the dollar index from a 5-1/2 year high, providing some support to gold.

In the physical markets, Chinese buying remained steady with premiums unchanged at about $1-$2 on Friday.

(Editing by Himani Sarkar and Sunil Nair)