By Jan Harvey
LONDON (Reuters) - Gold prices rallied to 3-1/2 month highs above $1,430 an ounce on Wednesday as rising tensions over Syria sparked safe-haven demand and a scramble among investors to reduce their bets on falling prices.
The precious metal reached a peak of $1,433.31 an ounce in early trade, its highest since May 14, as the United States and its allies geared up for a probable military strike against Syria that could come within days.
Western envoys have told the Syrian opposition to expect a military response soon against President Bashar al-Assad's forces as punishment for a chemical weapons attack last week, according to sources.
Spot gold was up 0.7 percent at $1,425.60 an ounce at 0933 GMT, while U.S. gold futures for December delivery were up $5.60 an ounce at $1,425.80.
"Short term, the focus is likely to rest on what happens in the Middle East," Credit Suisse analyst Tom Kendall said.
"There is a degree of safe-haven demand from in and around the Middle East, and with the move up in price in the last couple of weeks, you've had something of the order of 6 million ounces of short-covering going through on the Comex futures and options market. That's been playing into it as well."
Investors sold gold heavily in the first half of 2013, pushing prices to their lowest in nearly three years, on speculation that ultra-loose U.S. monetary policy was coming to an end. Many positioned themselves for further losses and have now had to close out those positions.
Prices have risen nearly 8 percent this month, their biggest monthly climb since January 2012, as expectations receded that the Federal Reserve is set to imminently curb its bullion-friendly $85 billion monthly bond-buying programme.
GRAPHIC-2013 asset returns: http://link.reuters.com/dub25t
GRAPHIC-2013 commod returns: http://link.reuters.com/reb25t
GRAPHIC-Gold/USD correlation: http://r.reuters.com/ryx52s
GRAPHIC-Syria crisis: http://link.reuters.com/fen62v
SYRIA SHAKES MARKETS
On the wider markets, European shares retreated after jitters over a possible U.S.-led strike against the Syrian government knocked Asian equities to a seven-week low, while the dollar index rose 0.2 percent.
Oil prices surged, with Brent pushing above $117 earlier in the day and the U.S. benchmark hitting its highest in more than two years.
"Gold and crude oil (have) a historical positive correlation, and it tends to strengthen during periods of rising geopolitical tensions," HSBC said in a note.
"Given investor uncertainty surrounding the Middle East, bullion has room for further gains in the near term should energy commodities including WTI crude oil continue to rally."
Gold prices hit record highs in Indian rupee terms for a second day on Wednesday as the rupee slumped to a record low versus the dollar.
The most-traded gold for October delivery on the Multi Commodity Exchange (MCX) hit a peak of 34,622 Indian rupees per 10 grams.
Among other precious metals, silver prices rallied to their highest since mid-April at $25.08 an ounce, tracking gold. Silver was later up 1.3 percent at $24.77 an ounce.
Spot platinum was up 0.8 percent at $1,530.99 an ounce, while spot palladium was up 0.3 percent at $744 an ounce.
(Editing by Jane Baird)
