Gold price set for biggest weekly drop in two months

London: Gold edged higher on Friday after two days of losses but remained on track for its biggest weekly slide in nearly two months on growing expectations of an increase in U.S. interest rates as soon as next month. 

The dollar retreated from its highest in nearly two months against a currency basket, but was heading for a third week of gains, keeping up pressure on gold.

Spot gold was up 0.1 percent at $1,255.06 an ounce at 1121 GMT, while U.S. gold futures for June delivery were gained $1.60 to $1,256.40. Spot prices are down 1.5 percent this week and facing a third straight week of losses. 

"From the point of view that the dollar has strengthened it makes sense that precious metals pare back some of the recent gains," Saxo Bank analyst Ole Hansen said.

"We, however, managed to find support at $1,245, a key reversal level on gold. Negative yields and the prospect of higher inflation will continue to provide support."

New York Fed President William Dudley said on Thursday that there was a strong sense among central bank officials that markets were underestimating the probability of policy tightening. 

That came a day after the minutes of the Fed`s April meeting revealed that most policymakers felt a rate increase might be appropriate as early as next month.

Gold is highly sensitive to rising rates, which lift the opportunity cost of holding non-yielding bullion. The metal has rallied 18 percent this year as investors bet the Fed would hold off from further increases. 

"The gold environment now is substantially different from what was apparent several weeks ago, when a weaker dollar and a benign rate environment were providing an element of support," INTL FCStone said in a report. "This is no longer the case."

Holdings of the world`s largest gold-backed exchange-traded fund, SPDR Gold Shares , rose by 4.5 tonnes on Thursday to their highest since November 2013. 

Gold demand in Asia was subdued this week by a strengthening dollar and weak seasonal demand in major trading centres. [GOL/AS]

Among other precious metals, silver was up 0.4 percent at $16.53, while platinum rose by 1.1 percent to $1,020.40 and palladiumgained 0.9 percent to $559.32. 

Palladium was the biggest faller of the week, down 4.7 percent. A deepening deficit in the palladium market this year was predicted by industry experts gathered for Platinum Week in London.