By Marcy Nicholson and Jan Harvey
NEW YORK/LONDON (Reuters) - Gold extended its rally to a three-week high on Thursday, supported by falling U.S. Treasury yields and world equity markets, and the outlook for U.S. interest rates.
The metal held its momentum after surging 1.5 percent on Wednesday, following below-consensus U.S. payrolls data and comments from U.S. Federal Reserve Chair Janet Yellen which dampened expectations of an imminent rate hike.
Gold is highly sensitive to rising interest rates, which lift the opportunity cost of holding non-yielding bullion while boosting the dollar, in which it is priced.
Spot gold > was up 0.6 percent at $1,269.66 an ounce at 3:42 p.m. EDT (1942 GMT), after rising 0.8 percent to $1,271.31, the highest since May 18. U.S. gold futures
Eli Tesfaye, senior market strategist for brokerage RJO Futures in Chicago, said that technical buy signals lifted prices, which were now above all moving day averages and key Fibonacci retracement levels.
"Gold is (in) a defined technical breakout. The long protracted bull flag tells me that it favours returning to the May high," Tesfaye said, forecasting a rise above $1,300.
"That gold is strong in light of the dollar strength, indicates a bullish factor for gold."
A broad decline in commodity and stock prices in major world markets lifted the Japanese yen as investors piled money into low-risk assets due to jitters about prolonged low inflation and negative interest rates. The dollar index <.DXY> rose above Wednesday's five-week low. [USD/]
Also bullish for bullion, investors have almost priced out the chance of a rate increase at the Fed's June 14-15 policy review and reduced the likelihood of a July increase to about 26 percent.
Markets remain cautious on Fed policy, analysts said.
"While there is likely further room to the upside for gold, there may be some road blocks to the rally near term," HSBC said in a note.
"There is always the possibility the Fed surprises the market and raises rates, which could rapidly reverse gains."
Among other precious metals, silver > hit a three-week high of $17.33 an ounce, up 1.8 percent, after climbing nearly 4 percent in the previous session, its biggest one-day gain since April 19.
Spot platinum > was down 0.2 percent at $1,003.18, while palladium > dropped 0.2 percent to $558.75.
(Additional reporting by Vijaykumar Vedala in Bengaluru; Editing by David Goodman and Richard Chang)
