Gold drifts lower but eyes second weekly gain

By Jan Harvey

LONDON (Reuters) - Gold extended losses for a third day on Friday as buyers cashed in on this week's rally to near three-week highs, but stayed on track for a second successive weekly gain as expectations faded for an imminent hike in U.S. interest rates.

The metal is up 0.8 percent so far this week, holding on to nearly half the sharp gains it made on Tuesday after downbeat U.S. data fuelled talk that the Federal Reserve will hold off raising rates at its September policy meeting.

Spot gold was down 0.1 percent at $1,336.00 an ounce at 0940 GMT, while U.S. gold futures for December delivery were $2 lower at $1,339.60. Gold peaked at $1,352.65 an ounce earlier this week after rallying 1.8 percent on Tuesday.

"Tuesday's rally was to be expected in light of the weak numbers out of the U.S., but the current more subdued tone, not so much," Capital Economics analyst Simona Gambarini said. "There is... maybe some profit-taking among some people who got in $30 lower."

"(Now) it's all about the Fed meeting in a couple of weeks. That's what investors are looking at."

Expectations that the Fed would stand pat on interest rates after hiking for the first time in nearly a decade in December have helped push gold 26 percent higher this year.

Gold is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding non-yielding bullion, while boosting the dollar, in which it is priced.

Markets remain uncertain over the outlook for rates, allowing the dollar to claw back some ground it lost against the euro after a European Central Bank statement on Thursday. It remained lower, however.

The ECB kept the door open to more stimulus but gave few hints about its next move, disappointing those who had priced in a dovish tone. The euro bounced in response.

"Gold was supported by initial euro gains as the ECB did not deliver any 'shock and awe' easing," HSBC said in a note.

Holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Shares, fell 0.13 percent to 950.62 tonnes on Thursday.

Gold demand in Asia remained subdued this week as higher prices kept buyers at bay, but upcoming festivals following a good monsoon in India may stimulate appetite for the metal, analysts said.

Silver was down 0.6 percent at $19.47 an ounce, while platinum was 0.3 percent lower at $1,079.40 an ounce and on track for first weekly gain in six, up 1.7 percent.

Palladium was down 0.3 percent at $680.75.

(Additional reporting by Nallur Sethuraman in Bengaluru; editing by Susan Thomas)