Gold takes breather after rally but still near three-week high

By A. Ananthalakshmi

SINGAPORE (Reuters) - Gold snapped a three-day winning streak on Wednesday but was well-supported near a three-week high, boosted by short-covering and weakness in the dollar.

News of U.S. lawmakers reaching a budget agreement to avoid a government shutdown next month dented some of gold's safe-haven appeal, while physical demand also cooled in Asia on higher prices.

But analysts said technical buying should support prices for a little longer.

Spot gold had eased 0.2 percent to $1,257.79 an ounce by 0714 GMT, after gaining 3 percent in the last three sessions - its strongest such winning run since October.

"Technically, gold should make a run for $1,270 and then $1,300 by year-end. However, it depends on whether it can hold support at $1,250 and the Fed meeting next week," said a Hong Kong-based precious metals trader.

Markets are watching the Federal Reserve meeting on December 17-18 to see if the U.S. central bank begins to taper its $85 billion in monthly bond purchases.

A scale-back would hurt gold, which has so far benefited from the monetary easing as it burnishes the metal's inflation-hedge appeal.

"We suspect that given the better-looking chart patterns, the current rally in gold will likely continue until $1,290, where we see next resistance or until the Fed meeting - whichever comes first," INTL FCStone analyst Edward Meir said.

Many believe investors have already priced in the possibility of a December tapering as prices did not drop sharply after last week's strong non-farm payrolls data.

Instead, since the data release gold has been climbing as funds have been hurrying to cover their short positions ahead of the Fed meeting next week. Similarly, the dollar index was trading near a six-week low on Wednesday as funds adjusted their long positions ahead of the gathering.

Data from the Commodity Futures Trading Commission showed on Friday that bearish bets on gold were at a 7-1/2-year high, while long positions have been cut to a six-year low.

Meanwhile in Washington, budget negotiators in the U.S. Congress reached an agreement that, if approved by the House and Senate, could restore some order to the nation's chaotic budget process and avoid another government shutdown on January 15.

(Reporting by A. Ananthalakshmi; Editing by Joseph Radford and Richard Pullin)