By Jan Harvey
LONDON (Reuters) - Gold edged back towards the previous session's two-week highs on Friday and stayed on track for its biggest weekly gain in two months, after the Federal Reserve sounded a cautious note on the pace of interest rate hikes.
The Fed signalled an increasingly careful approach to future rate hikes after a policy meeting on Wednesday, reassuring investors who had feared the U.S. central bank could move more quickly to tighten monetary policy.
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.
Spot gold was up 0.1 percent at $1,337.83 an ounce at 1140 GMT, and was nearly 2 percent higher on the week.
ING analyst Hamza Khan said the Fed had been following a pattern of talking up a rate cut ahead of its policy meetings, but failing to deliver.
"That's the sort of environment where gold will flourish, because it creates uncertainty, and it keeps rates low," he said. "The rest of the world has also been quite healthy (for gold) -- we've had dovish signals from the Bank of Japan, and we've seen ETF holdings beginning to recover."
Holdings of the world's largest gold-backed exchange-traded fund, New York-listed SPDR Gold Shares, rose another 6.5 tonnes on Thursday, data from the fund showed.
A steadier tone to the dollar after hefty losses earlier this week pulled gold back from the previous session's peak of $1,343.64, however. The dollar stabilised against a basket of currencies.
Stock markets, despite some weakness on Friday, were also on course for their biggest weekly gain in two months after a week of central bank meetings that left investors still unconvinced of U.S. policymakers' intent to put an end to an era of ultra-low interest rates.
"The ongoing strength in the global equity markets and some signs of stabilisation in the dollar could both start chipping away at gold's underlying strength," INTL FCStone analyst Edward Meir said in a note.
U.S. gold futures for December delivery were down $3.10 an ounce at $1,341.60.
Silver was 0.1 percent lower at $19.82, but was the biggest riser this week among the main precious metals, climbing more than 5 percent, the most since the week ending July 1.
Palladium was up 0.2 percent at $694.25, after rising 1.5 percent on Thursday. Platinum was 0.3 percent higher at $1,055.50 an ounce. On a weekly basis, it was up 4 percent, snapping seven straight weeks of losses.
(Additional reporting by Swati Verma and Nallur Sethuraman in Bengaluru; Editing by Adrian Croft)
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