By A. Ananthalakshmi
SINGAPORE (Reuters) - Gold traded near its highest level in four months on Friday and looked set to post its best week in ten months, as investors sought safety from market volatility after Switzerland unexpectedly scrapped a cap on the franc.
Spot gold was firm at $1,259.80 an ounce by 0728 GMT, after jumping to $1,266.11 on Thursday, a level last reached in September.
Thursday's volatility in global markets saw investors channelling money towards gold, often seen as an alternative investment to riskier assets. A breach of some key technical levels also pushed gold higher.
The metal is up about 3 percent for the week, its biggest weekly jump since March last year.
"Gold looks like the flavour of the month at the moment and has now pushed above some key downward trend lines against the dollar," said James Gardiner, a trader at MKS Group.
"The SNB announcement has really shaken the market," he said, adding that gold may see some momentum buying today.
Gold has gained over 6 percent so far this month, after two annual declines.
The Swiss National Bank shocked financial markets on Thursday by scrapping a three-year-old cap on the franc, sending the currency soaring against the euro and stocks plunging on fears for the export-reliant Swiss economy.
The U-turn sent the franc nearly 30 percent higher against the euro in chaotic early trading. Coming a week before the European Central Bank is expected to unveil a bond-buying programme to counter deflationary pressures, it fed speculation that this quantitative easing scheme will be so big that the SNB would have struggled to defend the cap.
The Swiss move sent most European shares soaring while bond yields and Swiss equities tumbled. U.S. stocks closed lower, marking a fifth straight session of losses.
Asian shares stumbled on Friday and the dollar skidded against the safe-haven yen after Switzerland's unexpected move.
In a reflection of improving investor confidence, SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings rose 1.35 percent to 717.15 tonnes on Thursday.
"Gold may be lifted further as the repercussions of the SNB action continue to reverberate in the markets and portfolio and real money managers decide on how to allocate holdings in light of franc developments. These actions will likely buoy gold, at least for a while," said HSBC analysts.
Physical demand, however, has seen a setback with the higher prices putting off buyers in Asia, the top consuming region.
In China, premiums on the Shanghai Gold Exchange fell to $1-$2 an ounce over the global benchmark, from about $3-$4 in the previous session, indicating softer demand.
(Reporting by A. Ananthalakshmi; Editing by Michael Perry and Richard Pullin)
