Gold set for biggest weekly loss in two months on U.S. Fed uncertainty

By Clara Denina

LONDON (Reuters) - Gold edged higher on Friday in response to a weaker dollar but remained on track for its sharpest weekly drop in more than two months as strong U.S. economic data raised uncertainty over the timing of a slowdown in stimulus measures.

Spot gold was up 0.3 percent to $1,245.66 an ounce at 1519 GMT, after hitting a fresh four and a half month low of $1,236.29 in the previous session.

U.S. gold futures for December delivery rose 0.2 percent to $1,246.10 an ounce.

Gold was on track for a 3.4 percent weekly drop, while spot silver also headed for its worst week since mid-September, down 3.7 percent so far.

"The gold price drop seen earlier this week has weakened the technical picture and the next important level to watch is obviously $1,200," said Bernard Dahdah, precious metals analyst at Natixis.

"Evidence that the U.S. economy is improving will lift the dollar, putting further pressure on the gold price in coming weeks."

A break of the key support area of $1,238-$1,240 an ounce would open up the potential for a broader move towards $1,180, ANZ said.

The dollar fell 0.4 percent against a basket of currencies.

Solid U.S. data over the past few weeks was hurting bullion prices as it could bolster the case for curbing stimulus soon. The Federal Reserve's massive bond-buying programme has burnished gold's appeal as a hedge against inflation.

Uncertainty over the timing of this tapering has pushed investors to take money out of gold, causing the metal to drop 25 percent this year.

Janet Yellen - the likely next Fed chair - said last week that she would press forward with the bank's ultra-easy monetary policy until officials were confident a durable economic recovery was in place that could sustain job creation.

GRAPHICS:

2013 asset returns: http://link.reuters.com/dub25t

Gold/USD correlation: http://r.reuters.com/ryx52s

GOLD ETF HOLDINGS DECLINE

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, fell 3.6 tonnes to their lowest since early 2009 at 856.71 tonnes on Thursday. Outflows have totalled 450 tonnes this year.

Physical demand picked up slightly due to the price drop but many buyers were still on the sidelines hoping for further declines, dealers said.

Data from the International Monetary Fund on Friday showed that Germany cut its bullion holdings for the second time in five months in October. The Bundesbank said it sold 3.421 tonnes of gold for federal coin minting.

Silver rose 0.1 percent at $19.93 an ounce, having touched its lowest since mid-August at $19.68 on Thursday.

Spot platinum rose 0.2 percent to $1,388.74 an ounce, while palladium gained 0.6 percent to $715.47 an ounce.

HSBC cut its 2013 platinum price forecast to $1,500 and ounce from $1,580 an ounce, and its 2014 forecast for the metal by $100 to $1,625 an ounce, saying weaker gold prices and a shift of investment into equities had hurt platinum this year.

(Additional reporting by Jan Harvey in London; Editing by Anthony Barker)