By Jan Harvey
LONDON (Reuters) – Gold hit its highest in 2-1/2 months on Friday and remained on track for its biggest annual rise since 2010 as a wilting dollar, political tensions and receding concerns over the impact of U.S. interest rate hikes fed into its rally.
The dollar, in which gold is priced, is sliding towards its worst year since 2003, damaged by tensions over North Korea, the Russian scandal surrounding U.S. President Donald Trump’s election campaign, and persistently low U.S. inflation.
The dollar’s drop to three-month lows versus a basket of currencies on Friday lifted gold to its highest since mid October at $1,303.90 an ounce.
At 1430 GMT spot gold <XAU=> was at $1,302.72 an ounce, up 0.2 percent, while U.S. gold futures
“In the last couple of weeks, trade has been relatively thin, yields have been under pressure and the dollar as well, so gold has profited from that,” ABN Amro analyst Georgette Boele said. “If you look over the year, dollar weakness has been the main theme.”
Gold will be vulnerable next year to a rebound in the currency, as well as any gains in yields, she said. The opportunity cost of holding non-interest bearing bullion increases when yields rise elsewhere.
The impact of three U.S. interest rate hikes this year was offset by the dollar’s weakness, Boele said. “The dollar is the most important driver, and then real yields. The Fed is increasing rates, but the dollar’s not profiting.”
Gold, which is also on course for its best month since August, has also benefited of late from technically driven momentum, analysts said.
ScotiaMocatta’s technical team said in a note that chart signals for the metal look positive after it broke above its 100-day moving average this week at $1,295 an ounce. “Momentum indicators are bullish as gold appears poised to target the October high (of) $1,306,” it said.
Among precious metals, palladium has seen the strongest rise this year, climbing 56 percent as concerns grew over availability after years of market deficit.
Spot palladium <XPD=> was down 0.5 percent at $1,059.65 an ounce, having hit its highest since February 2001 at $1,072 in the previous session. It has held in a historically unusual premium to platinum through the fourth quarter.
Spot silver <XAG=> was up 0.7 percent at $16.97, while platinum <XPT=> was 1.2 percent higher at $933.90. This year the two metals have risen by 6.5 percent and 3.8 percent respectively.
(Additional reporting by Nallur Sethuraman in Bengaluru; editing by Mark Heinrich and Jason Neely)