By Marcy Nicholson and Jan Harvey
NEW YORK/LONDON (Reuters) - Gold pared gains after hitting a 3-1/2-week high on Thursday, after a knee-jerk reaction to escalating tensions in the Middle East knocked stocks and drove investors into assets viewed as lower-risk, such as bullion and German bonds.
Silver rose nearly 3 percent to the highest level in more than five weeks before coming off its highs.
Stock markets worldwide were knocked lower and oil prices jumped after Saudi Arabia and its allies conducted air strikes in Yemen that fueled worries Middle East energy shipments may be put at risk. Wall Street later recovered.
The dollar was down earlier against the euro > but recovered in New York trading on the view central bank policy was more favorable for the U.S. currency. [MKTS/GLOB]
Spot gold > reached a peak of $1,219.40 an ounce, before retreating to trade up 0.6 percent at $1,195.25 at 2:47 p.m. EDT (1847 GMT). U.S. gold
"If the situation in the Middle East did not improve, prices could continue to rise, but otherwise they are likely to fall back below $1,200," Commerzbank commodity analyst Daniel Briesemann said.
Gold was heading for a seventh session of gains, its longest winning streak since August 2012.
"We're not as worried as maybe we had been at first hearing of this and at the same time the U.S. dollar rallied quite a bit," said Bart Melek, head of commodity strategy for TD Securities in Toronto, explaining why precious metals pared gains following news on Yemen.
Soft U.S. data earlier this week boosted expectations that the Federal Reserve will keep interest rates low for the time being, lifting gold. Fed Chair Janet Yellen is scheduled to talk Friday.
Still, investors remained wary over gold's outlook, with continuing outflows from SPDR Gold Trust
Physical demand was also slowing, hit by the rally in prices. In China, the second-biggest gold consumer, premiums - an indication of demand - eased to about $2-$3 an ounce, compared with $6-$7 last week.
Silver > prices outperformed gold, rising 2.7 percent in early trade, but pared gains to be up 0.5 percent at $16.93 an ounce.
Among other precious metals, platinum > was up 0.1 percent at $1,146.40 an ounce, while palladium > rose 1 percent to $762.65 an ounce.
(Additional reporting by Clara Denina; Editing by Susan Thomas and David Goodman)
