Gold set to post biggest weekly gain in nearly 2 years

By Frank Tang and Clara Denina

NEW YORK/LONDON (Reuters) - Gold eased on Friday but was set for its biggest weekly advance in nearly two years as fears of an imminent winding down of the Federal Reserve's monetary stimulus eased for now.

Spot bullion is on track to rise over 4 percent for the week, the biggest weekly gain since October 2011. The metal rallied after Fed Chairman Ben Bernanke on Wednesday said the U.S. central bank needed to keep an stimulative monetary policy in place given low inflation and an uncertain job market.

Signs of some physical supply tightness in gold, as reflected by high premiums and record volume in the Shanghai Futures Exchange and a surge in gold lease rates, helped to limit gold's losses on Friday.

Analysts said, however, rallying U.S. equities amid some positives signs for the economy and no indications of abatement in outflows from gold-backed exchange-traded funds could pressure the metal.

"The fact that the leading U.S. equity indices closed at record highs yesterday - which could prompt investors to switch once again from gold ETFs to equities - is problematic for gold," said Eugen Weinberg, head of commodity research at Commerzbank.

"Any prolonged recovery of the gold price is almost inconceivable unless the ETF outflows abate," Weinberg said.

Spot gold was down 0.4 percent at $1,279.61 an ounce by 12:06 p.m. EDT (1606 GMT), on track to snap a four-day winning streak.

U.S. Comex gold futures for August delivery eased $1.30 to $1,278.60 an ounce. Trading volume was on track to finish below its 30-day average, preliminary Reuters data showed.

Gold pared losses after government data showed that U.S. producer prices rose more than expected in June, pointing to increased inflation. Gold is usually seen as an hedge against inflationary pressures, but stronger inflation could also make the Fed more comfortable about reducing its stimulus.

Holdings of the world's largest gold-backed exchange-traded fund SPDR Gold Trust remained unchanged at 30.2 million ounces, or 4 1/2-year lows, on Thursday. The fund posted the biggest weekly loss of 2.6 percent since the end of April.

SUPPLY TIGHTNESS

The cost of borrowing gold stayed near its highest level since January 2009, reflecting dwindling supplies from bullion banks after heavy liquidation and resilient demand for physical gold products.

Trading volumes for gold and silver on the Shanghai Futures Exchange (ShFE) have jumped to record highs a week after the bourse launched after-hours trading, driven by a surge in investment and hedging demand.

Also, premiums on Chinese gold and silver products stay sharply higher than in the United States.

Meanwhile, total U.S. COMEX registered gold stocks fell to a 12-year low of less than 1 million ounces, underlying the tightness of the physical bullion market, said James Steel, HSBC's chief metals analyst.

Registered gold refers to the 100-ounce COMEX gold bullion bars that meet the standard of and are used to back requests for U.S. gold futures delivery.

Among other precious metals, silver fell 1.3 percent to $19.84 an ounce. Platinum inched down 0.1 percent to $1,403.24 an ounce, while palladium gained 0.5 percent to $719.97 an ounce.

(Additional reporting by A. Ananthalakshmi in Singapore; editing by Keiron Henderson and Kenneth Barry)