By Renita D. Young and Zandi Shabalala
NEW YORK/LONDON (Reuters) - Gold jumped on Friday as the dollar and U.S. stocks fell on an ABC news report that former national security adviser Michael Flynn was prepared to tell investigators that Donald Trump directed him to make contact with Russians during last year's presidential election campaign.
Shares on Wall Street fell immediately after the report. Investors feared the political news could affect whether the Senate will pass a tax bill backed by Trump.
Within moments, however, gold came off its highs and U.S. stocks bounced off lows. Michael Matousek, head trader at U.S. Global Investors in San Antonio, noted that U.S. Senate Republican leader Mitch McConnell said there were enough votes to pass the tax bill in that chamber.
The report about Flynn "was a good catalyst for people who were anticipating buying gold. It sparked the fear trade," Matousek said. Reuters has not verified the ABC News report, which cited a Flynn confidant.
Spot gold was up 0.3 percent at $1,278.01 an ounce by 1:39 p.m. EST (1839 GMT), after peaking to $1,289.50. The yellow metal was poised to end the week 0.8 percent lower.
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U.S. gold futures for February delivery settled up $5.60, or 0.4 percent, at $1,282.3 per ounce.
"Tax reform would be negative for gold," said Commerzbank analyst Carsten Fritsch, "because this will lead to higher inflation and more Fed rate hikes."
He said the recent weakness in gold could be attributed to an ongoing rally in global equity markets, boosted by "economic optimism and hopes regarding tax reform".
U.S. stocks this week hit record highs on bets that U.S. tax reforms would go through.
On Thursday, gold fell 0.7 percent to touch its lowest since Nov. 6 at $1,270.11.
A lack of clear drivers has kept gold between $1,265 and $1,300 an ounce throughout November, its narrowest monthly range in 12 years.
Silver dipped 0.6 percent to $16.33 after hitting $16.22 an ounce, its lowest since Aug. 8. It was down 3.8 percent for the week.
Palladium rose 1.5 percent to $1,021.60 and was up 2.4 percent for the week. Platinum was down 0.3 percent at $938.40 an ounce and was off 0.2 percent on the week.
Separately, federal prosecutors said Flynn pleaded guilty to lying to the Federal Bureau of Investigation and also admitted to speaking with a top member of the Trump transition team regarding his communications with Russia's ambassador to the United States.
(Additional reporting by Vijaykumar Vedala and Arpan Varghese in Bengaluru; Editing by David Gregorio and David Evans)
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